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COPYRIGHT DEPOSIT. 



The Elements of 
Speculation 



BY 

THOMAS GIBSON 

U 

Author of "Pitfalls of Speculation", "Cycles of Speculation", etc. 



With a Suggestion as to a Measure for Relief from Periodical 
Money Stringency. 

BY CHARLES F. M'ELROY. 



The Gibson P.ublishing Company, 
29 Broadway, Nev/ York 

1913 






Copyright, 1913, by 

The Gibson Publishing Company. 

All Rights Reserved. 



ICLA3 4 3C81 



CONTENTS 



Chapter Page 

I. ' Introduction 3 

II. The Anteriority of Security Prices 6 

III. Crops 11 

IV. Security Prices and Crop Prospects 35 

V. Money 44 

VI. The Currency Question 55 

VII. Our Foreign Trade 89 

VIII. Bank Clearings 98 

IX. Charts and Stop Loss Orders 102 

X. Mental Characteristics 113 

XI. The Future of Our Railroad and Indus- 
trial Securities 122 

XII. Speculation in Commodities 134 

XIII. Conclusion 142 



CHAPTER I. 
Introduction. 

For the sake of a clear understanding it may- 
be well to define the meaning of the word 
"Speculation'* as employed in this volume. 
There has been a widespread corruption of the 
term, particularly when applied to operations 
in securities. The popular understanding is 
that a speculator is one who gambles on mar- 
gin, who buys what he cannot pay for, or sells 
what he does not own. The man who buys out- 
right and pays for what he buys is called an 
investor. In both cases the terms are fre- 
quently misused. Any purchase of securities 
made because the stock or bond purchased is 
considered cheap and in hope of an advance in 
value and price, is a speculative purchase. It 
matters not whether the property so acquired 
is paid for in cash or a partial payment made 
in the form of a margin. Yet so hazy is the 
general opinion on this subject that the man 
who buys on margin and borrows the balance 
from his broker is called a speculator, while 
the man who buys outright and then hypothe- 
cates his certificates with his banker for a loan 
is called an investor. The process is exactly 
the same in both cases. The distinction is 
without a difference. If a purchase is made 
through a broker on margin, the broker must 
at once pay for the purchase in full, charging 
the unpaid balance to the customer as a loan. 
The actual certifictes are the broker's security 
just as they would become a bank's security in 
case they are made the basis of a loan. 

If we wish to draw a knife edge between the 
two terms ''speculation" and "investment," we 



4 Elements of Speculation. 

must look upon everything purchased in the 
belief that higher prices will be realized later 
as a speculative venture, and confine the word 
"investment" to purchases made for income 
return alone, without reference to possible 
profits through accretion in value or price. 

We are continually hearing warnings against 
speculation from rich men who have made their 
own fortunes in speculation — fortunes which 
could have been made in no other way — and 
Lorn self-appointed public educators who have 
not the slightest conception of what they are 
talking about. They accomplish nothing. They 
could accomplish a great deal if, instead of 
issuing blanket warnings against all forms of 
speculation, they would point out the hopeless- 
ness of gambling on inadequate margins or fol- 
lowing tips, charts or other ignis fatuui 
which lure the speculator to his undoing. If 
these mentors would impress their audiences 
with the fact that all the get-rich-quick devices 
masquerading as speculative opportunities are 
traps or dreams ; that speculation means a cor- 
rect forecasting of the future progress of a cer- 
tain territory, or of the entire general business 
situation, or of a specific security, and that the 
accuracy of such forecasting was wholly depen- 
dent upon personal toil and study, they would 
confer a greater boon on society than by bawl- 
ing to their followers to abjure speculation in 
any form and get rich saving their wages. 

Speculation, whether it is in securities, real 
estate, groceries or whatever, must be conduct- 
ed as a business, and when a man enters that 
business he must equip himself with intimate 
knowledge of its character and possibilities. I 
do not hesitate, after many years of observa- 
tion and experience, to state that no large for- 



Introduction. 5 

tune can be made in a brief period of time in 
the speculative world, and that no fortune of 
any kind can be made in any period of time by 
speculating blindly on tips or information. 
People have grown suddenly rich by discover- 
ing gold mines, etc., but that is accident rather 
than speculation. If any large fortune is ever 
made in speculation in a brief period, it is mere- 
ly an exception which proves a rule. 

In former works I have pointed out in a 
general way the errors and the possibilities of 
speculative ventures and offered ^suggestions as 
to correct methods. In this volume I will take 
up in more detail the principal fundamental 
factors governing security price movements 
and endeavor to show how such factors may 
be examined and weighed expeditiously and 
accurately. It is realized that the subject is 
too broad for a complete discussion in the 
limits of a single volume, but it is hoped that 
what is suggested will be found helpful and 
will act as an incentive to further personal ex- 
amination and study. 



6 Elements of Speculation. 

CHAPTER II. 
The Anteriority of Security Prices. 

In conducting speculative ventures intelli- 
gently, one of the most common errors is the 
failure to understand or give due considera- 
tion to the anteriority of security prices. Be- 
cause of this neglect, or lack of understanding, 
many people become disgusted and claim that 
the wide swings of security prices cannot be 
reasonably forecasted; that price movements 
are irrational, and that study is of no avail. 
This is all wrong. There are frequently inter- 
mediate spasms which carry prices above or be- 
low values, but these are always temporary and 
such artificial disturbances are quickly fol- 
lowed by a return of prices to their proper re- 
lation with values. It appears rather anoma- 
lous that so many people should rail against 
these periods of undue depression or inflation 
when we reflect that our greatest speculative 
opportunities are present when prices and val- 
ues are temporarily divorced. The hiatus may 
be due to manipulation, to scarcity or plethora 
of money, or to other causes ; but when these 
influences are removed, prices will seek values 
as surely as water seeks its own level. 

The stock market moves ahead of actual 
events. It is pushed either up or down by the 
force of buying or selling by the impor- 
tant interests which foresee coming pros- 
perity or depression. In 1905 we had an ad- 
vancing market in anticipation of good times 
ahead. In 1907 we had a great decline in stock 
prices and a boom year in business. In 1908 
and 1909 we had poor business and an advanc- 



The Anteriority of Security Prices. 7 

ing stock market. Wise and farsighted men 
bought in 1905 and sold in 1906. They sold to 
the large class of operators who grow excited 
at the sight of activity marketwise, who are 
encouraged by tangible evidences of business 
prosperity and who do not stop to reflect that 
all that is good has already been discounted by 
the high prices of securities. These buyers do 
not understand the precession of security 
prices, or if they do understand it, they do not 
properly employ their knowledge. 

We must, therefore, begin our study with 
the assumption that it is impossible to specu- 
late on what is known) that security prices al- 
ways move ahead of events, and that in order 
to succeed we must give our attention to the 
correct forecasting of future happenings. The 
man who attempts to speculative on "tips", or 
"inside information", or "tape reading", or in 
any other way without a special study of the 
more important basic factors might as well 
throw his money away and be done with it. It 
may be contended that it is impossible to study 
or correctly foresee great fundamental factors 
which are as yet unknown, but not so. By a 
careful study of precedent and of future pros- 
pects as indicated by present conditions, we 
may arrive at correct conclusions with a sur- 
prising degree of accuracy. It is not meant to 
say that we cannot gain anything from certain 
forms of open information, or from a scrutiny 
of the technical position of stocks, or the char- 
acter of buying and selling. All these may be 
of use as our education progresses, but they are 
of minor importance. If our basic views are 
correct, and if we operate reasonably without 
asking or expecting too much from the market, 



8 Elements of Speculation. 

no intermediate reversals can injure us and our 
hopes of profit will eventually be realized. If, 
on the other hand, we ignore the basic factors 
or form careless and incorrect conclusions, 
nothing can save us. 

There are certain important fundamentals 
bearing on security prices which are respon- 
sible for all great advances or declines. What 
these factors are and how we may examine and 
read them with the greatest facility and accur- 
acy, I will endeavor to explain in this volume. 

One important suggestion may be offered. In 
conducting examinations it will be found that 
our greatest aid is derived from precedent. It 
goes without saying that a normal growth must 
be allowed for in many cases. Production of 
minerals, agricultural products, railway earn- 
ings, etc., should gradually keep pace with in- 
creased population and it is important that 
we determine whether such growth is normal, 
subnormal or abnormal, either generally or in 
specific instances* This is not a difficult task. 
The greatest danger in consulting precedent lies 
in the very common practice of examining too 
brief a period and forming conclusions on en- 
tirely insufficient grounds. \Comparisons of 
one month with a preceding month are usually 
ridiculous. There are certain seasons of the 
year when prices of money naturally rise and 
fall, certain seasons when railroad traffic is 
light or heavy, and so through a long line of 
factors. And comparisons of one year with an- 
other are not much better. An abnormal year 
of production of wheat, or of railroad earnings, 
or whatever, may be followed by a recession as 
compared with that abnormal year, and by this 
careless method of reckoning odious compari- 



The Anteriority of Security Prices. 9 

sons are frequently drawn. The railroad earn- 
ings of a certain year may appear unfavorable 
by contrast with the preceding year, but may 
appear just the reverse by comparisons with all 
other preceding years. As the value of prece- 
dent is largely dependent on history repeating 
itself when similar conditions exist, we should, 
whenever an abnormal deviation from the line 
of natural growth or accretion is apparent, seek 
the reason for such departure, and when that 
reason is found, it will be easy to determine 
whether such causes are existent or non-exist- 
ent now, and so our deductions will be cor- 
rectly based. 

There is a tendency on the part of students 
of speculative probabilities to try to make their 
examinations too exhaustive. This is com- 
mendable when applied to the statistical ex- 
amination of a specific property, but in deter- 
mining the long swings of security prices in 
general, we may concentrate our attention on a 
few important fundamentals and give only sec- 
ondary consideration to minor factors. Stu- 
dents who wish to make their examinations and 
deductions very thorough are frequentlv found 
wandering about in a bewildering jungle of 
figures and precedents, some of which contra- 
dict others, and the efforts to reconcile the 
whole only result in confusion. This form of 
study also leads very frequently to the attach- 
ing of undue importance to insignificant or in- 
terdependent factors. The course of the se- 
curity markets is dependent largely upon the 
general prosperity of the country or, more 
broadly speaking, the general prosperity of the 
civilized world. The two most important basic 
factors making for prosperity are good crops 



10 Elements of Speculation. 

and satisfactory money conditions. Satisfac- 
tory money conditions are dependent to a great 
extent on the crops and our foreign trade. If 
we scrutinize these dominant influences" 
carefully we will find that our time is employed 
to the greatest advantage. Almost all other 
influences are merely offshoots of one or all the 
three factors mentioned. It is found that in 
twenty-five years only one instance occurred 
where the stock market did not reflect good or 
bad crops in its movements. We cannot, how- 
ever, wait until the outcome of the harvests 
is a known quantity, for the market, moving 
ahead of events, will have discounted the good 
or bad results before they are apparent. Thus, 
in our year of greatest cereal and cotton pro- 
duction (1906) a very large advance occurred 
during July and August. When the large crops 
became a matter of history their effect had been 
duly measured and discounted. The same 
thing has been true in almost all similar cases. 
The speculative rewards go to those who, by 
assiduous study and intelligent deduction, ob- 
tain a clear perspective of the probable future 



Crops. 11 






CHAPTER III. 
Crops. 

So many other things are dependent on the 
products of the soil that the crops may easily 
be classed as the greatest of our fundamentals. 
The products of mines and forests are im- 
portant and require examination from time to 
time in order to ascertain if the supply is keep- 
ing pace with demand, or if we are over or un- 
der-producing in certain quarters, but mines 
and forests do not require the same attention 
and investigation as do the agricultural pro- 
ducts, as they are not subject to severe annual 
fluctuations through climatic conditions, insect 
ravages or the other ills that plant life is heir 
to. 

Each year we draw from the soil through 
farm products from eight to nine bil- 
lion dollars more or less. If the amount is dis- 
tinctly less because of small crops, we are seri- 
ously affected in numerous ways; commodity 
prices may be higher because of the shortage, 
but higher prices will not cure the troubles aris- 
ing from short crops. Our exportable surplus is 
smaller; the high prices between consumers 
and producers at home is merely swapping dol- 
lars; railroad traffic is reduced; labor is not 
fully employed; the masses suffer because of 
high prices. Large yields at low prices are 
very much to be preferred to small yields at 
high prices. A good many observers are apt to 
fall into the error of thinking that the ideal 
condition is a large yield at high prices, but 
such conditions are usually due to very short 



12 Elements of Speculation. 

crops in other parts of the world and such a 
state of affairs acts as a boomerang, for the 
purchasing power of the world is reduced by 
the payment of high prices for the necessities 
of life, and our securities and manufactures 
suffer accordingly. Normal conditions, the 
world over, is the ideal state of affairs. 

The man who undertakes to study crop con- 
ditions and prospects will find a world of in- 
formation at his command. There are several 
good trade organs which gather and distribute 
the news of progress and probabilities ; the gov- 
ernment furnishes frequent reports during the 
season and much other valuable literature from 
time to time. Railroads and large business con- 
cerns gather statistics annually, many of which 
are available to the public, while brokerage 
houses and grain dealers employ their own 
experts for the benefit of their clients. There 
are also good books of a technical character 
which clear up many perplexing questions. 
Exhaustive statistical records can be had for 
little or nothing. 

Unfortunately there is also a great deal of 
misinformation on the subject. People who 
are interested in advancing or depressing the 
prices of securities or commodities circulate 
misleading or false reports and even go so far 
as to employ experts who bias their reports 
according to a dictated policy. A good many 
farmers and planters who allow their cupidity 
to override their integrity make a practice of 
exploiting disaster and claiming crop damage 
on the theory that this will influence prices and 
benefit them accordingly. The false reports 
are not convincing, however, if proper atten- 
tion is given to the study of the subject, and it 



Crops. 13 

is seldom the case that conscientious students 
who make their examinations comprehensive, 
are far out of the way in their estimates. It 
will not do to take much for granted, as we will 
quickly discover when we look at the great va- 
riations between two or more estimates of the 
same crop, published simultaneously. One 
may be extravagantly high and another ex- 
travagantly low. 

The most widely used estimates and reports 
are those issued by the Department of Agricul- 
ture. The most important of these documents 
are a weekly weather report issued on Tues- 
day of each week and monthly reports of acre- 
age and condition of all important crops. These 
exhibits are published in the following months : 

April — Condition of winter wheat and rye. 

May — Acreage and condition of winter wheat 
and rye, condition of meadows and spring 
pastures, spring ploughing and abandoned 
winter wheat acreage. 

June — Condition of winter wheat, spring 
wheat, rye, barley, oats, clover and rice; aver- 
age condition of spring pastures, apples and 
peaches. 

July — Acreage and condition of corn ; con- 
dition of winter and spring wheat, winter and 
spring rye, oats and barley, potatoes and to- 
bacco, clover, timothy, apples and peaches. 

August — Condition of spring wheat, corn, 
rye, oats, barley, tobacco, and acreage and 
condition of hay. 

September — Condition of spring wheat, corn, 
tobacco and fruits. Also condition of winter 
wheat, rye, oats and barley at harvest. 

October — Yield per acre of wheat, rye, oats 
and barley. Average condition of corn. 



14 Elements of Speculation. 

November— Average yield of corn, tobacco, 
etc., as compared with preceding year. 

December — Acreage and condition of winter 
wheat and rye. 

Other reports are issued in January and 
February giving general miscellaneous crop 
statistics. 

The reports on cereals are customarily issued 
on the eighth day of the month, showing acre- 
age or condition or both, as of the last day of 
the preceding month. It is frequently necessary 
to give consideration to changed conditions in 
the interval which elapses between the date of 
compilation and the date of publication. For 
example, a low condition may be shown be- 
cause of drought, and this may be improved by 
several days of precipitation. It will be ob- 
served that the three months from June first to 
September first, is the most important period 
for our growing crops. In the three months of 
June, July and August, the greatest damage 
occurs from dry weather or excessive rainfall. 
Corn and cotton are also affected by the date 
of the first killing frost. No fixed line can be 
drawn as to the approximate date of danger 
from frost, as an early spring may bring the 
crop out of danger at an earlier date, or vice 
versa. Late spring planting and an early kill- 
ing frost would almost certainly work serious 
injury. 

The principal cereal crops which are to be 
considered as to their bearing on business con- 
ditions and security prices are wheat, corn and 
oats. Let us first examine the condition, acre- 
age and production of these products for the 
last ten years as shown by the reports of the 
Department of Agriculture. 



Crops. 



15 



TABLE I. 

Showing Condition of Wheat, Corn and Oats on the 
First of the Months Named — 1902 to 1911 Inclusive. 





Apr. 


May 


June 


July 


Sept.* 


June 


July 


Aug. 
89.7 


Sept. 


1902... 


78.7 


76.4 


76.1 


77.0 


80.0 


95.4 


92.4 




1903... 


97.3 


92.6 


82.2 


78.8 


74.7 


95.9 


82.5 


77.1 


. , 


1904... 


76.5 


76.5 


77.7 


78.7 




93.4 


93.7 


87.5 


66.2 


1905... 


91.6 


92.5 


85.5 


82.7 






93.7 


91.0 


89.7 


87.3 


1906... 


89.1 


91.0 


82,7 


85.6 




* ' 


93.4 


91.4 


86.9 


83.4 


1907... 


89.9 


82.9 


77.4 


78.3 






88.7 


87.2 


79.4 


77.1 


1908... 


91.3 


89.0 


86.0 


80.6 






95.0 


89.4 


80.7 


77.6 


1909... 


82.2 


83.5 


80.7 


82.4 






95.2 


82.7 


91.6 


83.6 


1910... 


80.8 


82.1 


80.0 


81.5 






92.8 


61.6 


61.0 


63.1 


1911... 


83.3 


86.1 


80.4 


76.8 




•• 


94.6 


73.8 


59.8 


56.7 






, SPRING WHEAT ^ 




OA 


Tc; 














July 


Aug. 


Sept. 


Oct. 


June 


July 


Aug. 


Sept. 


1902... 




87.5 


86.5 


84.3 


79.6 


90.6 


92.1 


89.4 


87.2 


1903... 




79.4 


78.7 


80.1 


80.8 


85.5 


84.3 


79.5 


75.7 


1904... 




86.4 


87.3 


84.6 


83.9 


89.2 


89.8 


86.6 


85.6 


1905... 




87.3 


89.0 


89.5 


89.2 


92.9 


92.1 


90.8 


90.3 


1906... 




87.5 


88.1 


90.2 


90.1 


85.9 


84.0 


82.8 


81.9 


1907... 




80.2 


82.8 


80.2 


78.0 


81.6 


81.0 


75.6 


65.5 


1908... 




82.8 


82.5 


79.4 


77.8 


92.9 


85.7 


76.8 


69.7 


1909... 




89.3 


84.4 


74.6 


73.8 


98.7 


88.3 


85.5 


83.8 


1910... 




85.4 


79.3 


78.2 


80.3 


91.0 


82.2 


81.5 


83.3 


1911... 




80.1 


69.6 


70.3 


7 


0.4 


85.7 


68.8 


65.7 


64.5 



^Includes winter and spring. 



TABLE IL 

Showing Acreage of Wheat, Corn and Oats — 
1902 to 1911 Inclusive. 



-Wheat- 



Spring 
Acres 
1902—17,620,998 
1903—16,954,457 
1904—17,209,020 
1905—17,990,061 
1906—17,705,868 
1907—17,079,000 
1908—17,208,000 
1909—18,393,000 
1910—19,778,000 
1911—20,381,000 



Winter 
Acres 
28,581,426 
32,510,510 
26,865,855 
29,864,018 
29,599,961 
28,132,000 
30,349,000 
28,330,000 
29,427,000 
29,162,000 



Corn 

Acres 

94,043,613 

88,091,993 

92,231,581 

94,011,369 

96,737,581 

99,031,000 

101,788,000 

108,771,000 

114,002,000 

105,825,000 



Oats 

Acres 
28,653,144 
27,638,126 
27,842,669 
28,046,746 
30,958,768 
31,837,000 
32,344,000 
33,204,000 
35,288,000 
37,763,000 



16 Elements of Speculation. 

TABLE III. 

Showing Production of Wheat, Corn and Oats— 

1902 to 1911 Inclusive (Bushels) 

Year Wheat Corn Oats 

1902—670,063,000 2,523,648,000 987,843,000 

1903—637,822,000 2,244,177,000 784,094,000 

1904—522,400,000 2,467,481,000 894,596,000 

1905—692,979,000 2,707,994,000 953,216,000 

1906—735,261,000 2,927,416,000 964,904,000 

1907—634,087,000 2,592,320,000 754,443,000 

1908—664,602,000 2,668,651,000 807,156,000 

1909—737,189,000 2,772,376,000 1,007,353,000 

1910—695,443,000 3,125,713,000 1,126,765,000 

1911—621,338,000 2,531,458,000 922,298,000 

In examining Table 1, the first noticeable fact 
is that there is normal deterioration in condi- 
tion after the first report. This is particularly 
pronounced in spring wheat. Until very re- 
cently the disregarding of this normal dete- 
rioration has caused much confusion and varia- 
tion in estimates of final production. One 
statistician would take the condition as shown 
in the first report, arrive at the indicated pro- 
duction per acre, subtract the abandoned acre- 
age, when given, and multiply by the remain- 
ing acreage. It is plain that this would, in a 
majority of cases, indicate a much larger yield 
than would be harvested. Others attempted to 
allow for deterioration according to their own 
ideas, and each estimate was different from the 
others. In 1911 the government, for the first 
time, adopted a method of expressing quan- 
titative estimates which will no doubt come 
into more or less universal use in a short time. 
This method is to take the deterioration from 
the date of each report to the end of the grow- 
ing season, average it for a number of preced- 
ing years and allow for the average amount of 



Crops. 17 

falling off in the estimate of final yield. Such 
estimates can never be reduced to an exact 
science but the plan employed is as good as any 
so far suggested. Hereafter we will arrive at a 
quantitative estimate each month which will 
not be reduced if normal deterioration occurs. 
The crop indicated will be shown each month 
until it is harvested. 

An explanation of the form and meaning of 
the monthly reports is given as follows by the 
Department of Agriculture. 



INTERPRETATION OF ESTIMATES OF CON- 
DITION AS EXPRESSED IN PER- 
CENTAGES OF THE NORMAL. 

The conditions of various crops is estimated period- 
ically during the growin^g season by the Department of 
Agriculture. These estimates are expressed in the form 
of a percentage, the base, or 100 per cent, being termed 
a "NORMAL" CONDITION. 

Three inquiries are often made as to such condition 
reports, namely: (1) What is a NORMAL CONDI- 
TION? (2) What yield is indicated by a normal con- 
dition? and (3) What is the method or formula for in- 
terpreting a given estimate of condition in terms of 
indicated production; in other words, with a given con- 
dition, how is the indicated production determined? 

A NORMAL CONDITION may be defined as a con- 
dition that will produce A NORMAL YIELD, if such 
condition is maintained until harvest. BUT IV HAT 
IS A NORMAL YIELD? 

Most farmers know from experience approximately 
what their fields ought to produce, with the usual mode 
of farming, with normal weather conditions, and with- 
out unusual loss, disease, insects, or other mjurious fti- 
fluences. A yield under such favorable, though not ex- 
traordinary conditions would be a normal yield, 
which is more than an average yield but less than 
a maximum possible yield. A condition which may 
produce a normal yield, as thus described, is a nor- 
mal, or 100 per cent condition. 



18 Elements of Speculation. 

A normal yield for one farm or section may vary from 
that for another. On one field a normal yield per acre 
of corn might be 80 bushels, and on another field 12 
bushels. A normal yield of corn for one State is more 
than 40 bushels per acre, for another State it is less 
than 14 bushels. 

THE CONDITION OF A CROP at a given date is 
expressed by the percentage of a normal yield which 
may be produced if no change in the condition or status 
of the crop occur from the given date to the time of 
harvest. For example, if the condition of the wheat crop 
on June 1 were such that, with no change in condition 
— ^that is, normal influences from that date to harvest — 
only three-fourths of a normal yield could be expected, 
the condition would be reported as 75 per cent; if only 
one-half a normal crop could be expected, the condition 
would be reported as 50 per cent; if 10 per cent more 
than a normal yield could be expected, the condition 
would be reported as 110. 

THE NORMAL YIELD OF A CROP FOR A 
STATE OR FOR THE UNITED STATES MAY BE 
DETERMINED approximately in a practical way by 
multiplying the average yield per acre for any number \ 
of years by 100 and dividing the product by the average, p^v 
for the same years, of the condition of the crop at or 
near the time of harvest. For example, the condition 
of corn is reported the last time as of October 1 ; if the 
average condition of the crop on October 1 for the ten 
years 1899-1908 was 80 per cent, and if the average yield 
per acre in the ten years 1899-1908 was 28 bushels per 
acre, it may be assumed that 80 per cent of normal con- 
dition will produce 28 bushels; therefore, by proportion, 
100 per cent will be 35 bushels ; that is, 
28 X 100 -^ 80 = 35. 

An average for five years, instead of ten, or any 
number of years, may be used for this comparison, but 
with slightly varying results. 

This method cannot give a precise equivalent of 100 
per cent, because a change sometimes occurs m a crop 
after the date of the last condition report and before 
harvest, and also because the data used are estimates 
and subjects to errors of judgment. But for practical 
purposes the method is valid for obtaining approxi- 
mations. 

A normal yield being known, it is a simple process 
TO REDUCE ANY GIVEN CONDITION FIGURE 
TO ITS YIELD EQUIVALENT; that is, multiply 



t-cW^ 



Crops. 



19 



the normal yield by the condition figure, and divide by 
100. For example, if the condition of com is 80 per cent, 
where a normal or 100 yield is 35 bushels, the indicated 
yield would be 80 per cent of 35 bushels, or 28 bushels 
(80X35^100). 

The yield obtained by the method thus described is the 
yield which may be expected providing the condition of 
the crop does not decline or improve after the date of the 
estimate. But as a crop advances to maturity some por- 
tion of it usually suffers from some damaging influences, 
causing a decline in condition. 

TO FORECAST THE PROBABLE OUTCOME 
OF A CROP ON THE BASIS OF THE CONDI- 
TION AT A GIVEN DATE, ACCOUNT IS TAKEN 
OF THE AVERAGE CHANGE {USUALLY DE- 
CLINE) IN CONDITION FROM THE GIVEN 
DATE TO THE TIME OF HARVEST, it is assumed 
that the change in condition to the time of harvest will 
be the same as an average change. In other words, 
it is assumed that the probable yield will be in the same 
ratio to the average yield as the condition of the crop 
on a given date is to the average condition on that date. 

For example, on the basis of a ten-year average, sup- 
pose the average condition of com in the United States 
on July 1 is 87 per cent, the average yield is 27 bushels. 
Suppose the condition on July 1 is 75; it is then 
assumed that the probable yield (?) will be to 27 
bushels as 75 is to 87, which is 

^^g^ ^^ =23.3 (bushels) 

That is, multiply the average yield by the indicated 
condition at the given date and divide by the average 
condition on the same date. 

The "normal" yield per acre (decade 1899-1908) of 
various crops for the United States (based upon the ten- 
year average of the percentage of normal condition of 
crop at or near the time of harvest and the average yield 
per acre in the same years) is found to be approximately 
as follows: Winter wheat, 17.5 bushels; spring wheat, 
17.5 bushels; corn, 32.6; oats, 36.8; barley, 30.8; rye, 
18.1; buckwheat, 21.8; potatoes, 118.1 bushels tobacco, 
968.8 pounds; cotton, 280.1 pounds; rice, 35.5 bushels; 
flaxseed (five-year average), 11.9 bushels. 

THE "NORMAL" YIELD OF CROPS PER ACRE, 
THAT IS, THE YIELD PER ACRE WHICH IS 
EXPECTED UNDER NORMAL CONDITIONS, IS 
GRADUALLY INCREASING. 



20 Elements of Speculation. 

It will be noted from the condition tables 
that a high or low condition in the early 
months does not always insure a large or small 
crop. This may be due to weather conditions, 
insect, rust or smut damage, small initial acre- 
age or abandoned acreage, all of which must 
be watched and taken into consideration. 

In making allowance for abandoned acreage, 
it is necessary to reflect that there is always some 
abandonment and that such acreage does not 
represent a total loss, as in most cases it is util- 
ized for the production of other cereals which 
require later planting. 

After the initial reports of acreage, condition, 
abandoned acreage, etc., are published, the daily 
progress of crops may be followed more satis- 
factorily by reference to climatic changes, and 
the published reports of precipitation and temp- 
erature, than by attention to crop-killing stories 
from different isolated localities. There is no 
such thing as a perfect crop season. There is 
always some spotted damage, and this so im- 
presses the man who reports it that its import- 
ance is exaggerated. Hail storms can cut a field 
all to pieces, but hail storms are always local. 
Insect damage has been vigorously exploited al- 
most every year, but the fact remains that the 
loss in cereals from this cause is only trifling. 
Serious damage seldom occurs from late frosts 
in the spring of the year. Floods have at times 
caused serious damage, but very rarely — only 
once in recent years (1904). The greatest and 
most widespread losses are due to weather condi- 
tions, and it is by a study of these changes that 
we can arrive at the safest and most accurate 
conclusions. 

The most important states in the production 
of wheat, corn and oats are shown in the follow- 



Crops. 21 

ing tables in the order of their importance. I 
have taken the year 1910 for the illustrations in- 
stead of 1911 for two reasons — first, that 1910 
was more nearly a normal year than 1911; 
second, the production figures of 1911 are 
still subject to revision. The object sought 
in these four tables is to show the relative im- 
portance of leading states as to acreage. The 
casual observer is apt to be misled by crop- 
killing advices unless he is conversant with 
the facts. He may hear, for example, that the 
spring wheat crop of Iowa is a failure and be 
impressed by that statement, but when he ob- 
serves that Iowa raises about 7,000,000 bushels 
of spring wheat, while Minnesota raises about 
94,000,000 bushels, the matter is viewed in an- 
other light. 



Table IV. 
WINTER WHEAT. 

(States raising 10,000,000 bushels or more.) 

Production 

Acreage 1910 

State 1910 (Bushels) 

Kansas 4,300,000 61,060,000 

Indiana 2,627,000 40,981,000 

Nebraska 2,100,000 34,650,000 

Illinois 2,100,000 31,500,000 

Ohio 1,944,000 31,493,000 

Pennsylvania 1,556,000 27,697,000 

Oklahoma 1,556,000 25,363,000 

Missouri 1,821,000 25,130,000 

Texas 1,252,000 18,780,000 

California 950,000 17,100,000 

Michigan 869,000 15,642,000 



22 Elements of Speculation. 

Production 
Acreage 1910 

State 1910 (Bushels) 

Washington 676,000 13,858,000 

Maryland 794,000 13,816,000 

Oregon 467,000 11,068,000 

Tennessee 910,000 10,647,000 

New York 444,000 10,523,000 

Virginia 795,000 10,176,000 

Other States 4,266,000 64,560,000 



Total 29,427,000 464,044,000 



Table V. 
SPRING WHEAT. 

(States raising over 5,000,000 bushels.) 

Production 

Acreage 1910 

State 1910 (Bushels) 

Minnesota 5,880,000 94,080,000 

South Dakota 3,650,000 46,720,000 

North Dakota 7,221,000 36,105,000 

Washington 810,000 11,745,000 

Iowa 350,000 7,315,000 

Colorado 289,000 6,329,000 

Oregon 297,000 5,346,000 

Other States 1,281,000 23,759,000 



Total 19,778,000 231,399,000 



Crops. 23 

Table VI. 

CORN. 

(States raising over 10,000,000 bushels.) 

Production 

Acreage 1910 

State 1910 (Bushels) 

Illinois 10,609,000 414,812,000 

Iowa 9,473,000 343,870,000 

Missouri 8,300,000 273,900,000 

Nebraska 8,000,000 206,400,000 

Indiana =. 5,120,000 201,216,000 

Texas 8,800,000 181,280,000 

Kansas 8,900,000 169,100,000 

Ohio 3,960,000 144,540,000 

Kentucky 3,630,000 105,270,000 

Tennessee 3,720,000 96,348,000 

Oklahoma 5,772,000 92,352,000 

Arkansas 2,884,000 69,216,000 

Michigan 2,100,000 68,040,000 

Mississippi 3,232,000 66,256,000 

Georgia 4,532,000 65,714,000 

Pennsylvania 1,586,000 65,026,000 

Alabama 3,524,000 63,432,000 

Louisiana 2,493,000 58,835,000 

North Carolina 3,072,000 57,139,000 

Minnesota 1,724,000 56,375,000 

Virginia 2,142,000 54,621,000 

South Dakota 2,162,000 54,050,000 

Wisconsin 1,575,000 51,188,000 

South Carolina 2,418,000 44,733,000 

New York 680,000 26,044,000 

West Virginia 920,000 23,920,000 

Maryland 710,000 23,785,000 

New Jersey 290,000 10,440,000 

Other States 1,674,000 37,811,000 

Total 114,002,000 3,125,713,000 



24 



Elements of Speculation. 



Table VII. 
OATS. 

(States raising over 10,000,000 bushels.) 

Production 

Acreage 1910 

State 1910 (Bushels) 

Iowa 4,800,000 181,440,000 

Illinois 4,500,000 171,000,000 

Minnesota 2,736,000 78,523,000 

Nebraska 2,650,000 74,200,000 

Wisconsin 2,320,000 69,136,000 

Ohio 1,765,000 65,658,000 

Indiana 1,850,000 65,490,000 

Michigan 1,505,000 51,170,000 

Kansas 1,400,000 46,620,000 

New York 1,338,000 46,161,000 

Pennsylvania 998,000 35,130,000 

South Dakota 1,525,000 35,075,000 

Missouri 780,000 26,208,000 

Texas 695,000 24,325,000 

Oklahoma 632,000 23,068,000 

Montana 350,000 13,300,000 

North Dakota 1,628,000 1 1,396,000 

Oregon 302,000 10,419,000 

Other States 3,514,000 98,446,000 

Total 35,288,000 1,126,765,000 



Abnormal or subnormal temperatures or 
precipitation in certain months of the growing 
season do not always indicate probable dam- 
age. A great deal depends upon what follows 
or what has preceded such conditions. A dry 
fall followed by only normal rainfall during 
the growing season may work havoc with 
spring wheat and other cereals. The soil has 



Crops. 25 

not stored up its usual amount of moisture, and 
abnormally heavy rainfall will be necessary for 
a large crop. A dry spring followed by co- 
pious rains sometimes produces the best gen- 
eral crops, as the roots go down seeking for 
water and the stand is firm and good. On the 
other hand, a wet spring followed by insuffi- 
cient moisture is very bad, as the roots spread 
out laterally and when the dry weather comes 
they have only a coating of dust to protect 
them. Cool weather in a period of drought is 
always helpful, as it greatly reduces evapora- 
tion. A wet fall and a heavy snow covering 
in the winter months is always a most promis- 
ing condition, unless there is too much alter- 
nate freezing and thawing in February and 
March. A fair knowledge of soil conditions 
and a constant and intelligent examination of 
precipitation and temperatures will be found 
essential to correct estimates of probable pro- 
duction. 

It has been stated that some improvement 
has been made in the methods of calculation 
offered by the Government, but there is much 
to be desired. The trouble lies in the necessity 
of adopting some system of averages on which 
to base estimates. It is impossible to do this 
satisfactorily in a case where each year's re- 
sults are subject to irregular fluctuations and 
specific changes. It is also impossible to make 
anything more than machines out of the ac- 
countants and statisticians who handle the 
figures, and this leads at times to results which 
do not square with reason. Estimates founded 
either on average production per acre or aver- 
age condition, frequently turn out very badly. 
Two illustrations of this may be offered. 



26 Elements of Speculation. 

In estimating the spring wheat crop of 1911 
the Department of Agriculture based the prob- 
able crop on production of 13.7 bushels per 
acre, simply multiplying the acreage by 13.7. 
This figure, 13.7, was obtained by adding the 
production per acre for the preceding five 
years and dividing by 5. But the spring wheat 
crop of 1910 was a failure (only 11.7 bushels 
per acre) and this single figure, the lowest in 
years, brought down the general average too 
much. The average production for the five 
years preceding 1910 was 14.1 bushels per acre. 
If we go back for ten years and eliminate two 
years of absolute crop failure and one year of 
unusually large production, we still have over 
14 bushels per acre. 

Even more misleading is the method of 
averaging condition and subtracting for so- 
called normal deterioration. Under this meth- 
od we find that in the last ten years the condi- 
tion of winter wheat has averaged slightly 
lower on July 1 than on June 1 ; but in seven 
years out of the ten conditions improved, and 
in three years there was enough deterioration 
to offset all the improvement. But that is not 
the worst of it. The deterioration is traceable 
to a specific cause, about the only cause, in 
fact, which could cause deterioration in winter 
wheat in a harvest month. The cause is a late 
spring. Harvest is deferred and the standing 
grain suffers. How absurd it appears to apply 
this law of averages to a year where the spe- 
cific cause is absent and possibility of damage 
in June cancelled by an early harvest. 

There is only one way to employ the figures 
given by the Government or private statisti- 
cians, and that is to make each report a law 



Crops, 27 

unto itself. Determine whether or not planting 
has been early or late, the condition of the soil, 
etc., and keep track of precipitation and tem- 
peratures from week to week. Use the figures 
of acreage and condition only as a tentative 
basis and do what the accountants cannot be 
expected to do, i. e., modify arithmetical calcu- 
lations by employing reason and common 
sense. 

One of the greatest aids to correct conclu- 
sions in the periods between Government 
crop reports is a daily examination of 
temperatures and precipitation. This receives 
too little attention ; and, strange as it may ap- 
pear, no compilation has ever been arranged 
showing normal precipitation and temperatures 
in all important States by months. This omis- 
sion is supplied by the following tables: 



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30 Elements of Speculation. 



Cotton. 

Cotton is one of the greatest factors in our 
export trade and is growing in importance from 
year to year. In 1901 cotton made up, in dol- 
lars, about 18% of our total exports of mer- 
chandise; in 1903, 22%; in 1905, 25%; in 1907, 
27%; in 1909, 27%, and in 1910, 29%. This 
was partly due to larger exports and partly to 
higher prices. 

The condition, acreage and production of 
cotton in the growing season for a period of 
years has been as follows : 

Condition of Cotton in Growing Season on the 
First of Month Named. 

Period 1901 to 1911 Inclusive. 

Year June July Aug. Sept. Oct. 

1901 81.5 81.1 77.2 71.4 61.4 

1902 95.1 84.7 81.9 64.0 58.3 

1903 74.1 77.1 79.7 81.2 65.1 

1904 83.0 88.0 91.6 84.1 75.8 

1905 77.2 77.0 74.9 72.1 71.2 

1906 84.6 83.3 82.9 77.3 71.6 

1907 70.5 72.0 75.0 72.7 677 

1908 79.7 81.2 83.0 76.1 69.7 

1909 81.1 74.6 71.9 63.7 58.5 

1910 82.0 87.0 63.7 72.1 65.9 

1911 87.8 88.2 89.1 73.2 71.1 

Acreage and Production of Cotton 1901 to 1911 
Inclusive. 

(Production in bales 500 pounds to the bale.) 

Years Acreage Production 

1901-2 27,950,000 9,675,771 

1902-3 27,874,000 10,827,168 



Crops. 31 

Years Acreage Production 

1903-4 28,907,000 10,045,615 

1904-5 31,730,000 13,679,954 

1905-6 26,117,000 10,804,556 

1906-7 31,347,000 13,595,498 

1907-8 31,311,000 11,375,461 

1908-9 32,444,000 13,587,306 

1909-10 31,918,000 10,290,395 

1910-11 33,196,000 11,426,000 

1911-12 35,000,000 16,050,000 

In the above tables the progress of the crop 
in August is represented by the condition fig- 
ures of September 1, etc. In the table of acre- 
age and production, the years are separated as 
they are because the picking of cotton is not 
completed or the total crop known until the 
following year. In comparing the condition 
and production figures, the last figure in 
"years" may be disregarded. Thus condition 
of 1904 applies to production of 1904-5, etc. 

It will be observed that either a high or low 
condition of cotton in the early months fre- 
quently ends in a disappointing crop. This is 
more pronounced in cotton than in cereals. 
Only twice in twenty years have we had a 
June condition above 90 (1896, 97.2; 1902, 95.1) 
and on both occasions the crop was a failure. 
In 1896 the condition fell from 92.5 on July 1 
to 64.2 on September 1, and 60.7 on October 1. 
In 1902 the final condition was 58.3. On the 
other hand, a low June condition frequently 
ends in a good crop, as may be seen by refer- 
ence to the foregoing tables. August is usually 
the crucial month. While it is well to keep 
track of acreage and condition in the early 
months, the daily study of weather and precipi- 



32 Elements of Speculation. 

tation during the latter part of July and the en- 
tire month of August will give us our first de- 
pendable line on probable production. 

The cotton producing states are given below 
in the order of their importance. 

Cotton Producing States and Yield of 1910. 

(In bales, 500 pounds to the bale.) 

Yield 1910 
State (bales) 

Texas 3,140,000 

Georgia 1,750,000 

Alabama 1,174,000 

Mississippi 1,160,000 

South Carolina 1,116,000 

Oklahoma 900,000 

Arkansas 815,000 

North Carolina 675,000 

Tennessee 305,000 

Louisiana 260,000 

Florida 58,000 

Missouri 48,000 

Virginia 13,000 

California 12,000 

Total 11,426,000 

Cotton is more subject to damage by frost 
than is any other important crop. This is be- 
cause the plant is more or less perennial. That 
is to say, it continues to put out new bolls 
late into the fall, until stopped by frost. The 
following table shows the date of the first 
killing frost in the principal cotton growing 
states for a period of years. 





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Security Prices and Crop Prospects, 35 

CHAPTER IV. 
Security Prices and Crop Prospects. 

While the crucial period for our leading 
cereal crops, as to their effect on security 
prces, is during the months of July, August 
and September, it is necessary for us to keep a 
constant watch on progress during the months 
of April, May and June, in order to keep fully 
informed as to soil conditions, acreage, etc. 

As has been stated, the period from July 1 to 
September 1, is the one in which crop prospects 
-are the dominant factor. If investigations are prop^- 
the dominant factor. If investigations are prop- 
erly conducted, the greatest opportunities of the 
year, together with the largest amount of ma- 
terial on which to base conclusions, is offered 
during these three months. There is a hazy 
popular idea that June, July and August are 
vacation months and that comparatively narrow 
movements occur during this period. But not 
so. August is the most active month of the en- 
tire year and the month in which greatest gen- 
eral advances are shown. This is not always re- 
flected in volume of security transactions, but it 
is evident in price changes. August has been a 
month of advancing prices in all but three recent 
years. This is due to the fact that crop pros- 
pects are pretty well known by August 1, and 
if damage has occurred it has already been dis- 
counted in security prices. It would not do at 
all to merely accept the fact that August has 
almost always been a "bull" month in the past, 
and operate blindly on that principle. That 
would be chart playing pure and simple. But 
if we take the trouble to examine crop prospects 



36 



Elements of Speculation. 



carefully, to determine how much damage has 
been done and whether or not the damage has 
been discounted in security prices, adding to this 
a general survey of business conditions and a 
comparison of income yield on stocks as com- 
pared with the price of money, we have a simple 
and very solid basis on which to operate. At 
no other time of the year, will our indications 
of probable price movements be so easily read as 
in the three months of the crop growing period. 

In order to show the dominance of crop pros- 
pects as a factor in the security market, the fol- 
lowing tables and data have been prepared. 



Table Showing Total Cereal and Cotton 
Production 1897 to 1910, Inclusive 

(Cereals used are Wheat, Corn, Oats, Oats, 
Rye and Barley.) 

Total Cereal Total Cotton 

Production Production 

(Bushels) (Bales) 

1897 3,225,933,000 10,989,052 

1898 3,411,689,000 11,534,303 

1899 3,517,487,000 9,459,935 

1900 3,519,879,000 10,266,527 

1901 3,157,056,000 9,675,771 

1902 4,350,138,000 10,827,168 

1903 3,827,315,000 10,045,615 

1904 4,081,459,000 13,679,954 

1905 4,518,456,000 10,804,556 

1906 4,839,872,000 13,595,498 

1907 4,166,013,000 11,375,461 

1908 4,339,016,000 13,587,306 

1909 4,719,441,000 10,290,395 

1910 5,143,187,000 11,426,000 



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38 Elements of Speculation. 

Taking up the years seriatim, we find the 
following facts: 

1897. — Very large crops — Wheat and cotton 
broke all previous records. Prospects excellent 
in June, July and August. Stock market made 
great advance. 

1898. — The June decline followed a very rap- 
id advance of over ten points in May. In this 
year, we again broke all previous records for 
wheat and cotton. After September the mar- 
ket continued rapidly upward until the end of 
the year. 

1899. — Combined production of wheat, corn 
and oats was larger than in 1898, and the June 
prospects were excellent. Cotton, however, fell 
off 2,000,000 bales as compared with the pre- 
ceding year, and final production of wheat was 
smaller by about 130,000,000 bushels. The rea- 
son for the June enthusiasm was due to good 
initial crop prospects which dwindled rapidly. 
The early condition of winter wheat was given 
as 77.9, but at harvest was 65.6. June condition 
of spring wheat was 91.4, and August condi- 
tion 83.6. June cotton condition was 85.7 and 
at harvest 62.4. Coirn and oats made large 
yields and the June advances in security prices 
was maintained, but did not continue rapidly. 

1900. — Total cereal production exceeded that 
of the preceding year by only a narrow margin 
and wheat production again fell off — 25,000,000 
bushels less than 1899 and over 150,000,000 less 
than 1898. Cotton was a fair crop, but this was 
not indicated in the early reports, June 1 condi- 
tion being 82.5 and July 1. 75.8. During the 
month of June the condition of spring wheat 
dropped from 87.3 on the first of the month to 
55.2 at the end of the month. This terrific slump 



Security Prices and Crop Prospects. 39 

in prospects was the greatest specific cause of 
the June break. 

1901. — We started off with excellent crop 
prospects in June and finally made the largest 
wheat crop in history. But in July it became 
apparent that a great falling off would occur in 
corn and oats. Later, cotton prospects became 
poorer. The July break was the most severe 
shown in any declining month in the period con- 
sidered, and a glance at the total cereal produc- 
tion given in the table above will show that these 
fears were well based and accurately reflected 
in security prices. The greatest damage was to 
corn. So severe was the drought of 1901, that 
prayers for rain were offered in many Western 
states by official proclamation of the governors. 
One peculiarity of this scare in 1901, was that 
for some reason the Government greatly erred 
in their calculations of total cereal yield. The 
first figures given for wheat, corn, oats, rye and 
barley, by the Department of Agriculture were 
2,791,346,000 bushels, and the census figures is- 
sued later gave 3,157,066,000 bushels. 

1902. — In 1902 we broke all records for cereal 
production. Wheat production was smaller than 
the revised figures of 1901, but corn was greater 
by more than one billion bushels, and the cotton 
crop was the largest on record, v/ith the excep- 
tion of 1898. This was all reflected in the stock 
market. 

1903. — ^This was one of our panic years, and 
in July, we had a hard time with the elements. 
In the West, tremendous damage occurred from 
excessive rainfall and floods; in the East, 
we suffered from extensive forest fires in the 
Adirondacks. The floods caused great damage 
to railroads and to farm work. Damage to 
crops was considerably over-estimated, particu- 



40 Elements of Speculation. 

larly the flood damage, and while cereal produc- 
tion fell off, the decrease was nothing like what 
was expected in July. Cotton also turned out 
better than expected. 

1904. — The same argument may be adduced 
here as was the case in 1897 — i. e., that we were 
recovering from a period of depression. But, 
as in the former case, that recovery had gone a 
long way before crop prospects became a market 
factor. Cereal production was not so large as 
in 1902, but was larger than in any preceding 
year with that exception. The cotton crop was 
the largest ever made either before that year or 
since, the current crop excepted. 

1905. — All records for cereal production were 
broken. Cotton was a fair crop by comparison 
with all preceding years except 1904. It is a 
strange fact that the most sensational attempts 
at crop killing for years were made in July. 
Wheat advanced 7 cents a bushel between July 
18 and July 21 on talk of drouth and black rust. 
The damage was, in truth, comparatively noth- 
ing. This was also the rnonth of the scandal in 
the cotton bureau which resulted in the resigna- 
tion of the chief statistician. The juggling of 
the cotton report resulted in issuing figures 
which carried cotton up 100 points in a few 
minutes. These figures were afterwards revised 
by the Government. The crop scares were so 
obviously wrong, that they were refuted by well 
posted people, and only a moderate decline oc- 
curred, which was quickly recovered. 

1906. — June of this year was filled with politi- 
cal scares. Congress was in session until the 
end of the month. The Hepburn rate bill be- 
came a law. President Roosevelt transmitted 
several reports to Congress which were con- 
sidered inimical to corporate enterprise, and the 



Security Prices and Crop Prospects, 41 

pure food bill became a law. There was some 
apprehension about crops which was largely due 
to the June Government report on winter wheat, 
showing a falling off of over 6 points as com- 
pared with the preceding year. The Govern- 
ment again badly underestimated one of our 
leading cereal crops, indicating that oats would 
fall off about 150,000,000 bushels as compared 
with 1905. The crop turned out larger than 

1905. The acreage devoted to oats was under- 
estimated by about 3,000,000 acres. 

After the July flurry, crop prospects steadily 
improved and total cereal production again made 
a record. The cotton crop was very large, al- 
most equalling the high figures of 1904. 

1907. — Another panic year, but crop prospects 
had some market effect. Condition of winter 
and spring wheat was satisfactory early in the 
season, but both crops went backward consider- 
ably before harvest. Cotton condition was low 
in June. After the Government reports of June 
10, the crop news improved throughout the 
month, but this news was not borne out by the 
Government reports of July 10. The total 
cereal crop fell off sharply as compared with 
both 1905 and 1906. 

The cotton crop was a good one except by 
comparison with the very large years 1904 and 

1906. Crops did not dominate movements in 
this particular year so much as is usually the 
case, as money conditions were causing great 
confusion and irregularity. The August decline 
does not appear to be justified by crop prospects. 
It was in August, 1907, that the State of Ala- 
bama revoked the charter of the Southern Pa- 
cific to do business in Alabama, and close on the 
heels of this came the hysterical $29,000,000 
Standard Oil fine. The State of Arkansas at- 



42 Elements of Speculation. 

tempted to declare forfeited the property of the 
Rock Island road in that state, and numerous 
other state measures were agitated. This add- 
ed to an already over-strained condition of af- 
fairs, and it is doubtful if even the most glowing 
crop prospects could have done more than cancel 
a portion of the decline. 

1908. — Cereal production turned out well in 
1908 and we made another bumper crop of 
cotton. The June decline in security prices 
followed a rapid advance of 16 points on the 
average in April and May, and may be consid- 
ered as partly due to reaction. The progress of 
the cotton crop was the principal incentive to 
prices, the July 1 report of condition of 83 on 
August 1 was the highest in that month for ten 
years with one exception (1904). 

1909. — Cereal production largest on record, 
with one exception. The season started with 
glowing prospects, but later on cotton reports 
showed up badly, condition falling 17 points be- 
tween June 1 and September 1. This stopped 
the advance promptly. 

1910. — Cereal production in 1910 turned out 
very satisfactorily, the total yield being the larg- 
est on record. The June decline was largely due 
to very bad conditions in spring wheat. The 
report of July 1 showed a condition of 61.6 as 
compared with 92.8 on June 1. Cotton was also 
acting badly, condition falling from 82.0 on June 
1 to 63.7 on August 1. This was a double 
blow, but in the middle of July it was figured 
that in spite of the bad conditions, our general 
cereal crop would be the largest on record and 
that cotton would make a fair crop. The mar- 
ket began recovering and advanced until 
September. 



Security Prices and Crop Prospects. 43 

It is clear from the above that the three- 
month period from June 1 to September 1 is 
one in which crop prospects make the market. 
It is also shown that while this period offers 
some of the greatest speculative opportunities, 
we can never be sure we are out of the woods 
before August 1 at the earliest. June has been 
the month of greatest uncertainty, as advances 
or declines in that month are more nearly 
equal in number. July shows a large majority 
of advances simply because crop prospects 
have been good in a majority of years. July 
breaks, when they do come, are rather severe. 
August shows only one insignificant decline, 
aside from the break of 1907, which, as has 
been explained, was not due to crop prospects. 
The reason for the large number of advances 
in August can be attributed to the fact that by 
that time prospects are pretty satisfactorily 
determined, and damage, if severe, has already 
been discounted in security prices. 



44 Elements of Speculation. 



CHAPTER V. 
Money. 

Much benefit may be derived from the study 
of money conditions. At times indications in 
this quarter are so plainly evident that they 
cannot be misunderstood, and it is remarkable 
that such signals are frequently disregarded or 
their purport misinterpreted or contorted. In 
the latter part of 1906 and early in 1907 the ex- 
pansion of credits was so serious that even a 
perfunctory knowledge of the functions of 
money and credits should have shown the dan- 
ger of panic conditions in the very near future. 
We were trying to finance a business boom and 
a stock market boom simultaneously, and it 
could not be done. One or the other had to suf- 
fer at once, and the lot fell to the stock market. 
The great decline in stocks in 1907 was partly 
due to the fact that the stock market had fully 
discounted the prosperity of 1907 and had be- 
gun discounting a period of depression; but the 
fact that the market underwent a spasm of de- 
moralization instead of an orderly readjust- 
ment of prices was largely due to our expan- 
sion of credits. 

The best barometer of contraction or expan- 
sion of credits is the percentage of loans to de- 
posits; but the percentage of specie to loans 
should be considered in connection with loans 
and deposits, as a high percentage of loans to 
deposits might not be serious if the percentage 
of specie to loans is also high, and vice versa. 
It is when the two spread apart; when loans 
are high and specie low, that the greatest dan- 



Money. 45 

ger exists. It is not always the case that a very 
low percentage of loans to deposits, accom- 
panied by a high percentage of specie, is en- 
couraging. This condition may arise from 
stagnation, as was the case in 1894 and 1895. 
During the last ten years we have witnessed 
two stock market panics, one in 1903 and one 
in 1907. Both were indicated by a high con- 
dition of loans to deposits and a low condition 
of specie to loans. In the early part of 1903 
loans reached 102% of deposits. This was the 
first time loans had exceeded deposits since 
1896. Specie simultaneously fell below 18% of 
loans. The stock market suffered a serious de- 
cline. In August, 1904, this condition was fully 
corrected, loans to deposits falling to 91% and 
specie to loans rising to about 253^%. A great 
upward movement followed in the stock mar- 
ket. In July, 1906, loans began expanding and 
reached about 107% in December of that year, 
specie falling at the same time to 17% of 
loans. The decline of 1907 followed. This 
condition was rapidly corrected in 1908, and by 
April of that year loans to deposits were be- 
low 96 and specie to loans above 26. The stock 
market advanced rapidly. We may find the 
same parallel for many years back, both as re- 
gards the great swings of prices and the 
smaller intermediate swings. In consulting 
such records, however, due allowance must be 
made for even worse conditions near the end 
of a panic than at its beginning. In December, 
1903, loans to deposits rose to almost 105%, 
with specie to loans down to 18%, and in No- 
vember, 1907, loans to deposits rose to 110%, 
while specie dropped below 15%. This bad 
state of affairs had already been discounted in 



46 Elements of Speculation. 

security prices and was not due to over-expan- 
sion of credits, but to the hoarding of money 
and general lack of confidence. It was the final 
spasm of a panic period. It is the initial and 
insidious growth before the decline that must 
be watched for danger signals, not the final 
convulsion. In the early stages, the high rate 
of loans represents over-confidence, wildcat en- 
terprises and extravagance; in the latter 
stages, nothing but temporary fright. 

In consulting the figures of percentage of 
loans to deposits some allowance must be made 
for the growing loanable surplus of banks, par- 
ticularly as the associated banks of New York 
furnish our only convenient barometer from 
week to week. This is not a great factor, how- 
ever. It is also occasionally the case that bet- 
ter or worse conditions obtain in the west than 
in New York. An examination of the occa- 
sional calls of the Comptroller will keep us 
reasonably well posted on the condition of all 
national banks. It is found that the uniformity 
is not often nor seriously disturbed, and the 
figures of the New York banks constitute a 
fairly accurate guide. 

No cut and dried figures as to just what con- 
stitutes the proper percentage of loans to de- 
posits or specie to loans can be given, but we 
may say, as a rough rule of thumb, that a per- 
centage of loans to deposits of from 95 to 100, 
together with a percentage of specie to loans 
of 20 to 23, is a normal state of affairs. These 
figures will vary a little at times. 

The tables which follow, showing percent- 
age of specie to loans and loans to deposits 
for a period of years will be found convenient 
in examining this phase of money conditions. 



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Money. 49 

The seasonal movements of money are natu- 
ral and inevitable and interest rates may rise 
or fall in certain months v^ithout materially 
disturbing the course of the security markets. 
Interest rates usually begin rising early in De-\ 
cember, and continue to rise during the first 
week or ten days in January. This is princi- 
pally due to preparation for the large January 
disbursements in the form of interest on bonds 
and notes and dividends on stocks. The holi- 
day trade is also a factor. After the first week 
or ten days of January, the funds which have 
been distributed begin to be redeposited or re- 
invested, and money becomes more plentiful. 
Interest rates ordinarily fall until the end of 
January and remain low until the middle of 
February, when the demand for funds in pre- 
paration for the spring trade again causes rates 
to harden. April, May and June are usually 
months of declining interest rates, but near the 
middle of June large fiscal institutions begin 
providing for the July disbursements. This 
causes an upward trend in interest rates. There 
is, how^ever, no following decline as is the case 
after the January rise. This is due to the fact 
that the crop moving period is at hand and the 
demand for money will be greater for several 
months to come than at any time during the 
year. Near the middle of August funds begin 
to flow westward and are fully employed until 
the end of October. The highest prices for 
money ordinarily occur in October, after 
which there is a slow decline until the prepara- 
tions for the January disbursements of the fol- 
lowing year bring a hardening of rates. 

It is found that in a majority of cases there 
has been an advance in the stock market dur- 



50 Elements of Speculation. 

ing December and January. This advance has 
usually started near the middle of December 
and culminated early in February. This repre- 
sents the forehanded buying by speculators 
who anticipate and discount the return flow of 
funds into the security markets in January. 
There is also, in a majority of cases, an advance 
in the stock market in the latter part of July 
and throughout the month of August. This up- 
ward movement, simultaneously with advanc- 
ing money rates, is due to crop prospects which 
are pretty well known in August and which 
are much more frequently favorable than un- 
favorable. The month of September shows a 
decline in stock prices in most cases, as the 
crops are then no longer in much doubt and 
the favorable effects have been fully dis- 
counted. The incentive to buy on good crop 
prospects has been great enough in August to 
overcome the advancing trend of money rates, 
but the acute stages in money begin in Sep- 
tember and this influence makes itself apparent. 
It would be ridiculous to assume that a safe 
mechanical plan for buying and selling in cer- 
tain seasons can be formulated. Nevertheless 
the price of money always has its effect on 
speculative operations, and it is essential that 
we know what is natural in different periods of 
the year, so that we may not be deterred from 
operations because of a misunderstanding of 
the seasonal changes. It is frequently the case 
that people who are satisfied with business or 
crop prospects become alarmed at rapidly ad- 
vancing prices for money and abandon their 
plans. Their fears are increased by the warn- 
ings of writers or prophets who either do not 



Money. 51 

know what they are talking about or are in- 
terested in promulgating fallacious views. 

In considering the effect of money rates on 
speculative investments we will also find it 
wise to give attention to the occasional hiatus 
between call and time funds. During most of 
the year the prices of call and time money rise 
and fall together, but July and August are or- 
dinarily exceptions to this rule. In July, par- 
ticularly,we find a declining trend in call money 
in the face of an advancing trend in commercial 
paper because, while the banks are storing up 
funds for the drain in the crop moving period, 
they can employ such funds from day to day 
and still hold them available by loaning on call. 
This affects only the larger speculators, as 
most brokerage houses have a rate of interest 
to clients which remains practically unchanged 
the year round. However, the advantage 
gained by the large operators encourages them 
to make ventures, and the general market is 
helped accordingly. 

One of the simplest and most reliable meth- 
ods of determining when the general average 
of security prices is too high or too low is to 
measure the average yield, at the market price, 
on seasoned dividend payers, and compare that 
yield with the price of money. It is shown 
that in the last ten years the lowest aver- 
age yield on ten selected dividend paying 
railroad stocks was slightly over 3% in the 
latter part of 1906 and the highest yield 
on the same stocks for the same period of years 
was 7}i% in November, 1907. In other words, 
the prices of these securities went so high in 
1906 that the return on money invested at the 
market price would only be about 3% and so 



52 Elements of Speculation. 

low in 1907 that they returned over 7% on the 
market price. Looking backward now it is 
very easy to see that in one case prices were 
ridiculously high, and in the other ridiculously 
low; but how many people took advantage of 
such knowledge? They were carried away by 
the speculative debauch late in 1906 and were 
unduly repressed and apprehensive in the panic 
period late in 1907. In the latter part of 1906, 
when these stocks were yielding only 3%, time 
money ruled steadily at 6% or above. True, in 
1907, time money got as high as 8% while the 
stocks were returning 7%, but everyone knew, 
or should have known, that such rates were 
only temporary. In January, 1908, time money 
was down to 5^4%, and in May, 1908, 3>4%. 

The yield on a specific stock may at times 
appear unduly low and at the same time the 
stock may be a good purchase, because of forth- 
coming rights or extra distributions or because 
of the probability of an increase in the dividend 
rate. All these things must be considered, but 
when the average rate of return rises above or 
falls below the fair value of money, a readjust- 
ment is inevitable. Money will go where it 
can get the highest wages. 

As in many other cases which confront us in 
forecasting security prices, no fixed rule as to 
when stocks are too low or too high as com- 
pared with money can be offered. The value of 
money not only fluctuates considerably, but 
there is, sometimes, a definite trend to higher or 
lower interest rates over a period of years. 
Under existing circumstances, we may reason- 
ably adopt the rough rule that when seasoned 
stocks with a good dividend record yield mate- 
rially more than 5% they are cheap; and when 



Money. 53 

they yield materially less than 5% they are 
dear. 

After each period of panic or depression, 
when money begins to come back into the se- 
curity markets and prices begin rising, we find 
a period of rotation. The bond and note mar- 
kets first show strength and activity, then pre- 
ferred stocks and high grade dividend payers 
are taken up, and finally the more speculative 
issues have their turn. In the final stages of 
a bull market, when speculation is rampant and 
inflation is present, there is not much discrimi- 
nation ; the excited public buys the wildcats as 
freely as it does the seasoned issues; more 
freely at times, for they present more golden 
opportunities to the imaginative buyer. 

The observer of the first stages of a bull 
period will frequently find his views disturbed 
by writers who will admit that in all former 
periods an advance in the general market has 
been preceded by activity in bonds and high 
grade stocks; but, say these writers, "the 
conditions are different now. Money is 
going into high grade securities because 
the owners of money have no confidence in the 
general run of stocks." This argument is in- 
evitable at the beginning of every period of re- 
habilitation. It appears extraordinary that any 
thinking man should consider it seriously. 
What the writers say is true as far as it goes 
but it does not go far. The reason which they 
give for the precedence of a certain class of 
securities has always been the reason for such 
precedence. Timidity is a personal character- 
istic of money, if the term is permissible. 
When money is sober, it is always cautious and 



54 Elements of Speculation. 

discriminative ; it is only when it is intoxicated 
that it becomes foolishly bold. 

The state of our foreign credits is an elusive 
factor in money, and no statistics are obtain- 
able on the subject. We may, however, make 
a fair estimate of our credits and the growth of 
credits abroad by watching exports and im- 
ports of merchandise and gold and other fac- 
tors affecting our balances. 

Our currency system is unquestionably a 
poor one, and many corrective suggestions 
have been offered, but none of them appear 
to solve the problem. In the following chapter 
Mr. C. F. McElroy has offered a plan which 
appears feasible, and which is worthy of seri- 
ous consideration. 



The Currency Question. 55 



CHAPTER VI. 

Relation of Inflexible Reserve Requirements to 

the Currency Question. 

By C. F. McElroy. 

Seasonal Stringency. 

Of all the phenomena peculiar to the money 
market, the most remarkable is the wide fluc- 
tuation in interest rates in the New York mar- 
ket, due to the wide variations in the supply 
of loanable funds. These fluctuations are wid- 
est in the call loan market, but they are also 
in evidence in the time money market, al- 
though in a lesser degree. The recurrence of 
high rates is so regular that, by taking into 
consideration the state of general business 
throughout the country, farm production, etc., 
one may predict with a reasonable degree of 
certainty what course interest rates will take 
at any given period of the year, particularly 
as regards the last half of the year. In order 
to show these changes at a glance, I have taken 
the high and low rates for call money and four 
months' loans for the past twenty years, and 
averaged each month separately and brought 
the result together in the following table: 

In examining these changes, it will be ob- 
served that, in the call money market, the 
average fluctuations in any month are quite 
wide, due to local causes; but it will also be 
observed that the tendency is toward a higher 
level during the last four months of the year. 
The tendency is not quite so marked in the 
time money market, but it is there. It should 



56 Elements of Speculation. 

AVERAGE HIGH AND LOW MONEY RATES 
ON CALL AND FOUR MONTHS. 

On call Four months 

January 1H@13^% 3M@ 4^% 

February li^@ 3^/4 3^@ 4^ 

March 1^@ 7^ 3^@ 4^ 

April 1M@ 6^ 3^@ 4^ 

May 1>4@ 8^ 3V8@ 4H 

June 1H@ 7^ 3K@ 4>^ 

July 1^@ 8% 35^@ 4^ 

August 1^@ 6 4 @ 5 

September l^/^® 8^4 4^© 5^ 

October 134@183^ 4^@ 554 

November 2 @17^ 4%@ 5 

December 2>^@30 . Wa® ^Vs, 

be stated in parenthesis, that in producing 
these averages, some abnormally high rates 
have had to be taken into the calculations ; for 
instance, in December, 1892, call rates reached 
40% ; December, 1895, 100% ; December, 1899, 
186%; December, 1905, 125%; November, 
1896, 96%; November, 1907, 75%; October, 
1896, 127%; October, 1907, 125%. It may be 
argued that these abnormal instances unduly 
raise the average and, therefore, should be 
eliminated, but I think that a little reflection 
will convince anyone that they should stay in, 
as they form a part of the effects produced from 
the causes which I shall attempt to make clear 
in the course of this article. 

The primary cause for the rise in interest 
rates during the last four months of the year, 
of course, is the demand for currency on the 
part of the interior banks for the purpose of 
moving the crops. This demand will be affect- 
ed one way or the other by the varying state 
of general business throughout the country. 
If business is good, more currency will be 
needed by the outside banks ; if poor, less will 



The Currency Question. 57 



be needed. But, always, there are the crops, 
and they must be moved. The necessities for 
currency in that direction will also vary with 
the volume of farm production and the ruling 
level of prices, but they are always so large 
that they form one of the knottiest problems 
with which the New York banks have to deal. 
Why, you ask, should this problem concern 
the New York banks in particular? It all 
arises from the attempt to impart some degree 
of elasticity to our currency system. The fram- 
ers of the laws governing the reserves of na- 
tional banks recognized the fact that, at cer- 
tain periods of the year, country banks do not 
need to carry as large a reserve as at other 
periods, and that to compel them to do so 
would be a hardship. In other words, the de- 
mands for currency, which the reserve is in- 
tended to provide for, is less at times than it is 
at other times. They met the objection against 
country banks carrying reserves in cash equal 
at all times to a stated percentage of their 
deposits by giving them the privilege of car- 
rying a portion of such reserves in the form 
of deposits with other designated "reserve" 
banks, and these "reserve" banks were, in ad- 
dition, given the privilege of carrying a por- 
tion of their reserves in designated "central 
reserve" banks. The result is that, after the 
crops have been moved, the banks in the forty- 
seven "reserve" cities are flooded with cash, 
and they, in turn flood the "central reserve" 
cities. New York, Chicago and St. Louis. And 
a further result is that New York must find 
profitable employment for the bulk of this 
golden flood, for, obviously, it would not do 



58 Elements of Speculation. 

to tie up very much of this sort of money in 
long time loans, and the market for call and 
other short time loans outside of New York 
being somewhat limited, Chicago and St. Louis 
banks compete with New York banks in the 
New York money market. When the crop- 
moving season arrives once more and the 
country banks begin to need currency, this 
money is withdrawn from New York, and New 
York banks are compelled to call in their de- 
mand and short time loans in order to keep 
their required reserves intact. Thus, while the 
system works admirably in imparting elastic- 
ity to the currency, so far as the country banks 
are concerned, it does not always work out 
so well for New York banks and their cus- 
tomers. In fact, more often than otherwise, 
in spite of all reasonable precautions. New 
York bankers are not always wholly prepared 
for this crop-moving demand when it arises; 
loans have to be called precipitately and gold 
imports resorted to, and when, as often hap- 
pens, we are not in a position to import gold 
or are actually exporting it^ the situation is 
greatly accentuated. Sometimes the Govern- 
ment assists by making deposits, but it is not 
always in a position to do that. Almost in- 
variably between September 1 and the end of 
December, New York banks lose enormous 
sums of cash to the interior, and, in order to 
bring down their deposits proportionately with 
their diminished reserves, loans are called right 
and left. For the purpose of showing the ex- 
tent of this movement of cash and its effect 
upon loans of the New York banks, the tables 
and chart on the pages following have been 
prepared : 



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62 Elements of Speculation. 

In the preparation of these tables, instead 
of averaging the four weeks of each month, the 
extreme of the diminishing or increasing trend, 
as the case may be, has been used in each in- 
stance, thus giving the full extent of each 
movement of currency into and out of the 
banks and the extreme high or low volume of 
loans. Each month has been averaged over 
the period of twenty years in order to give a 
composite view of the movements of currency 
and the accompanying expansion or reduction 
in loans, and these composite figures have been 
used in producing the chart which is presented 
as a convenient means of examining into what 
usually takes place. The exports and imports 
of gold, if taken into consideration, would ac- 
centuate rather than modify the lines which 
appear in the chart. They have, therefore, been 
left out of the calculations for the sake of sim- 
plicity. 

Some of my readers, no doubt, will find fault 
because of the pains taken to establish the 
already well-known fact that New York is 
cursed with alternate periods of scarcity and 
plethora of loanable funds, but, outside of the 
ranks of those who make it their business to 
keep track of such things, there seems to be a 
great deal of confusion of ideas on the subject, 
and, as the preventative or corrective measure 
which will be proposed in the course of this 
chapter is of a somewhat revolutionary charac- 
ter, it was thought best to make the picture as 
clear and sharp as possible so that all may 
understand the necessity for some change in our 
system of money and credits. 

The necessity for a change lies in the fact that, 
while the outlying districts are enabled, 



The Currency Question. 63 

through the workings of our reserve laws, to 
increase or decrease their supply of currency 
at will — drawing down their deposits of cur- 
rency with "reserve" banks when the exigen- 
cies of the crop-moving period or anticipation 
of greater business to follow in the wake of 
large crops demands more currency, or mak- 
ing their surplus funds earn something by de- 
positing with "reserve" banks when the de- 
mands fo rcurrency fall off — the "reserve" cen- 
ters in general and New York in particular 
must release cash just when it is most needed 
and receive cash when it is least needed. If 
the business of the country as a whole was not 
expanding each year, this state of affairs would 
be intolerable. As it is, the gradual expansion 
of bank loans from year to 3^ear absorbs the 
plethora, but something has to be sacrificed 
each year in order to take care of the scarcity. 
Each year a portion of the structure reared in 
the first half is torn down by the operations 
of the last half and must be rebuilt in the first 
half of the next year before the progress can 
be resumed. 

Thus, while the balance of the country is 
provided with a neatly fitting circlet of elastic 
currency, New York banks are worse off than 
if there was absolute rigidity at that end. Their 
circlet is converted into a straight rubber band, 
with one end anchored in New York and the 
country pulling and hauling on the other end. 
Small wonder, then, that the tension frequently 
approaches the breaking point. A great many 
so-called remedies for this evil have been pro- 
posed. But all of them are cumbersome, and 
not easy to put in operation. Without excep- 
tion, the plans offered are of such a compli- 



64 Elements of Speculation. 

cated nature that even fairly well posted bank- 
ers find difficulty in following out their pro- 
visions, and, even when the plans are thor- 
oughly understood, there is no certainty that 
their operation would bring the desired relief. 
I believe that a simple measure, which would 
bring relief for the greater part of our mone- 
tary troubles, has been found, and will en- 
deavor to make it clear in the succeeding para- 
graphs. 

Prevention of Autumnal Stringency. 

Tons of printer's ink and paper have been 
used in the past to depict the bad effects of our 
present currency system. A lengthy discus- 
sion of that subject, therefore, would be a mul- 
tiplication of words to no good purpose. The 
most effective argument so far produced has to 
do with the tendency of a plethora of loanable 
funds to promote over-speculation in securi- 
ties, for the reason that New York banks, in 
order to protect themselves against a sudden 
call for currency by the interor banks, must 
make their loans against easily converted 
or liquid securities. This is undoubtedly 
true. When money is extremely cheap, specu- 
lators are tempted to borrow it in order to 
make the difference between the price of money 
and the yield on securities; and, when money 
becomes scarce and loans are being called, they 
must sell out at a loss or pay a high rate of in- 
terest to carry them through to the next period 
of cheap money. But it is not so much the 
woes of the speculators with which the finan- 
cial community as a whole and the business in- 
terests of the country in general is concerned 
as it is with what sort of conditions would pre- 



The Currency Question. 65 

vail if we had not this alternate ease and tight- 
ness with which to contend, although we can- 
not wholly ignore the claims of speculators to 
some consideration in the matter. Speculation, 
conducted within reasonable bounds, is a nec- 
essary adjunct to our economic development. 
Without it, the development of the natural 
resources of the country would not have ad- 
vanced anywhere near so rapidly as it has. The 
speculation that is not of any benefit to the 
community and is harmful to it is that sort of 
crazy speculation which is induced by abnor- 
mally easy money rates plus misleading manip- 
ulation. If this periodical plethora of money 
in New York could be done away with, or at 
least modified to a considerable extent, much 
of this crazy speculation would be eliminated. 
The simplest method of getting away from 
this congestion of funds in New York, the one 
which would rightfully receive the most con- 
demnation, would consist of a change in the 
laws regulating the reserves of country banks. 
But such a change would be bitterly opposed 
by the country bankers for the simple reason 
that if they were not allowed to deposit a por- 
tion of their reserves with "reserve" banks, 
they would be deprived of a source of consid- 
erable revenue. And, furthermore, it would be 
opposed by banking interests generally for the 
reason that it would mean the tying up of vast 
sums in reserves which would be an economic 
waste of our financial resources. In short, it 
would mean that the plethora of money would 
simply be transferred from the New York 
group of banks to thousands of small country 
banks, and the flexibility of the currency, so 



66 Elements of Speculation. 

far as the outlying districts are concerned, 
would be taken away without imparting any 
flexibility for New York. Obviously, any mea- 
sure of this nature would be pre(inomed to 
failure. 

It will be necessary, then, to devise a meas- 
ure, if it is to receive the support of all con- 
cerned, that will not take away the privileges 
of the country banker or interfere with the 
flexibility of the currency outside of New York 
and which will impart flexibility to the cur- 
rency of the whole country. 

Now let us recapitulate a little and see how 
the flexibility of the currency in the interior 
has been accomplished. What causes the flex- 
ibility? The answer is obvious — the privilege 
enjoyed by the country banker of shipping 
out a big portion of the curency not actually 
needed, while still retaining the right to count 
such shipments (deposits with "reserve" 
banks) as a part of his own reserve against 
deposits in his own bank. In other words, the 
flexibility of the currency in the interior is 
accomplished by flexibility of reserve require- 
ments. Simple and effective without doubt. It 
is the solution of the old problem of how to 
eat your cake and still have it. 

But are the reserve requirements of the "cen- 
tral reserve" banks flexible? Not so. They 
must carry the required 25% or shut up shop. 
True, they are permitted by law to fall, tem- 
porarily, below 25% and are given 30 days' 
time in which to get back in line, but what 
bank or group of banks would dare to allow 
their reserves to drop below 25% for even a 
week with the law reading as It does. Confi- 
dence would receive an immediate jolt which 



The Currency Question. 67 

would result in runs that would call for more 
reserves than any of the banks could muster. 
Nothing very much short of 100% would save 
them from the mob of besieging depositors. 
But, if the law regarding reserves read differ- 
ently, confidence would be unimpaired so long 
as the banks observe the law. 

The whole thing resolves itself into this — we 
have provided for flexibility in the currency 
through flexibility of reserve requirements in 
a great many small money centers and have not 
done so in a few great and important money 
centers. That is manifestly unjust; it is class 
legislation. Arguing from cause to effect and 
from effect back to cause again, it seems to me 
we ought to make this matter of flexible re- 
serves a reciprocal affair. How is this to be 
accomplished? 

Up to date, the answer has been, ''Establish 
a Central Bank." That is easier said than 
done. A central bank for the United States, 
(not for the Government of the United States, 
but for the financial community of the United 
States), may be a solution or it may not be. I 
do not profess to know, and I venture to say 
that very few if any of the financial men of 
this country know with certainty that such an 
institution would actually accomplish what is 
needed. A great many think that it would, and 
are convinced in their own minds that it would, 
but there is so much complicated machinery 
connected with the workings of a central bank 
that those who understand it find it almost 
impossible to make others understand it. I 
believe that a central bank would relieve the 
"central reserve" banks of their present bur- 



68 Elements of Speculation. 

dens to some extent, at least, but it would sim- 
ply mean the transferring of the burden. If 
one institution strong enough to bear the bur- 
dens of the 59 ''central reserve" banks, could 
be devised, it would be a grand thing. But 
there is where the element of doubt enters, and 
this element of doubt is one of the things 
which retards the progress of the movement to 
establish a central bank. Other countries have 
central banks which do the work satisfactorily, 
but those countries have passed through their 
periods of rapid growth. The one shining ex- 
ception, of course, is Germany, and in that con- 
nection it is well to take note of the difficul- 
ties which have confronted the financial com- 
munity of that country during the Franco- 
German crisis. They might have, and probably 
would have, been worse off if they had not been 
possessed of a central bank which, through its 
note issuing prerogative, undoubtedly proved 
of assistance in tiding over the crisis; but the 
existence of a central bank did not obviate the 
necessity for enforced liquidation in many quar- 
ters where the liquidation was detrimental to 
the rapid economic progress of the country. It 
is a little unfair, of course, to use the German 
central bank as an argument against a central 
bank in this country; as a matter of fact, I do 
not wish the reference to it to be construed as 
such. But, whether or not a central bank 
would do the work for which it is designed, 
the indications now are that we are a long way 
of¥ from its establishment in this country. 

The Corrective Measure. 

Having no central bank to fall back upon, 
it seems to me that the simplest method of ef- 



The Currency Question. 69 

fecting a certain degree of flexibility for the 
whole country would be to allow the "central 
reserve" banks a little leeway in the matter of 
reserves at the time of greatest demand for 
currency. By reference to the tables already 
produced, it will be seen that, on the average, 
the time of greatest strain on the great money 
centers is during the months of September, 
October, November and December — the crop- 
moving period. Examination of the weekly 
reports of the New York clearing house banks 
shows that usually the drain of currency be- 
gins late in September and ends early in De- 
cember. Why not so amend our banking laws 
that the ''central reserve" banks, beginning on 
September 1 each year would be required to 
carry only 20% of their deposits in cash as a 
reserve, and during October and November, if 
necessary, only 15%, raising the requirements 
to 20% during December, restoring the reserve 
requirements to 25% during January and the 
succeeding months up to the following Sep- 
tember. This would allow the "central re- 
serve' banks to ship currency where needed 
without calling loans to bring their deposits 
down to the point where their cash reserves 
would equal 25% of the deposits. 

If this were the law, and the intent of the 
law made so plain that every one would un- 
derstand it as a measure designed to tide the 
whole country over a critical period which 
comes year after year at about the same time, 
no one would feel anxious or perturbed if the 
banks at the prescribed time allowed their re- 
serves to fall below 25%. It would be an en- 
tirely diflferent matter and be viewed by the 



70 Elements of Speculation. 

public in a much different light than if a bank 
or a group of banks should unexpectedly take 
advantage of the 30-day leeway now permitted 
by law. The principle of the thing would be 
no different from that involved in the privi- 
lege enjoyed by the country banker who is 
allowed at all times to fall below 25% in actual 
cash in his vaults. Time has demonstrated 
that the principle is absolutely sound. 

If this were the law, bankers in the "central re- 
serve" cities would not be compelled to employ so 
much of the temporarily idle funds of the coun- 
try in demand and other short time loans. The) 
would put such funds out in longer time loans, 
which would mean greater stability in interest 
rates and greater permanency of the enterprises 
for which the money is borrowed, for the steady 
growth of the business of the country already cre- 
ates a demand for these idle funds. But, as it is 
now, these idle funds are not as fully utilized in 
permanent investments as they should be. Bank 
ers dare not allow loans to extend much beyond 
the critical month of September, and the economic 
development of the country is retarded thereby. 
We advance in a jerky movement, whereas the 
advancement should be steady and continuously 
in step with other basic economic factors. We 
would keep step financially with other things if 
bankers in the "central reserve" cities were rot 
compelled during the last four months of the year 
to undo so much of the things accomplished dur- 
ing the first eight months. 

Real Object of a Reserve. 

When I first conceived the idea of imparting 
flexibility to the reserve requirements of the "cen- 
tral reserve" cities as a means of giving a certain 



The Currency Question. 71 

degree of flexibility to the currency of the whole 
country, I confess that the idea seemed somewhat 
appalling. A 25% cash reserve for this class of 
banks has become such a sacred institution that 
it seemed nothing short of sacrilege to tamper 
with it. But, as I reflected upon it, it seemed to 
me that we have allowed ourselves to gain a 
wrong impression as to what the real meaning of 
the word ''reserve" should be. Have we not set 
it up as a sort of a god to be gazed upon and wor- 
shipped, but not to be touched, even under the 
stress of most dire necessity? Why should we 
not look upon it as the business man or the cor- 
poration regards a reserve fund — as something 
which may be drawn against when the exigencies 
of business require it? A noted fiction writer, 
some years ago, added somewhat to his fame by 
means of a fanciful story about a big bank whose 
cash reserve of gold was surreptitiously replaced 
by pig iron and iron washers. The bank kept 
right on doing business, because the officials and, 
consequently, the public, had no slightest inkling 
of what had taken place, and the president of the 
bank, when the matter was brought to his atten- 
tion by the perpetrator of the "experiment," was 
the most surprised man in the world over the pre- 
posterous idea that his bank could go on with its 
business without a dollar of reserve. The story 
was obviously overdrawn, but it contained a 
germ of truth, and that is that the prime es- 
sential in the banking business is confidence. 
Without confidence, a 25% reserve is as good 
as nothing. With confidence, 15% is as good 
as 100%, and better, because it allows of a 
greater employment of the bank's resources. 
Wherefore, the conclusion is forced upon me 
that if, at certain well determined periods of 



72 Elements of Speculation. 

the year, we could facilitate the business of the 
country by an extension of banking facilities, 
then in the name of common sense let us ex- 
tend them. And, if the extension can be ac- 
complished by temporarily lowering reserve re- 
quirements, let us do that. 

The main idea is in a crude state, and, no 
doubt, would have to be modified in a great 
many ways before it would find entire accept- 
ance. For instance, there is the matter of se- 
curity for the difference between 15% or 20% 
and the regular 25% reserve to be taken into con- 
sideration, but it seems to me that the banks 
would find little difiiculty about putting up gilt- 
edged security equal to two, three or four times 
the amount of the temporary draft upon their 
cash reserves. There are, no doubt, many other 
objections which the trained bank manager could 
offer. 

The measure is not submitted as a cure-all for 
our monetary ills ; it is submitted as an expedient 
for bridging us over a definitely known and ever- 
recurring critical peniod — the crop-moving pe- 
riod. 

Demonstration of the Measure. 

The figures which follow have been produced 
for the purpose of showing what the effect 
would have been if this measure had been in 
force during the past twenty years. 

In order to properly understand the figures 
which follow, a little preliminary explanation is 
necessary. But, first of all, it should be steadily 
kept in mind that there is a vast difference in the 
character of the demands for currency in the 
small money centers and that in the big centers 



The Currency Question. 73 

like New York. In the small centers a large pro- 
portion of the currency wanted during the crop- 
moving period is needed as currency pure and 
simple; it circulates among the people. On the 
other hand, the currency is needed in New York, 
primarily, as the basis of credit, or, to put it an- 
other way, as reserves. It is in playing this dual 
role that our old favorite, ''Hard Cash," fre- 
quently falls down. Every once in a while his 
lines call for his appearance on both sides of 
the stage at the same identical moment. If 
Shakespeare had found himself short of actors 
in producing the "Midsumm.er Night's Dream," 
I am sure he would have been resourceful enough 
to substitute something that would suggest a 
minor character, however remote the resem- 
blance, just as he did with makeshifts for scenery, 
etc. We already have in circulation about all the 
makeshifts, in the way of Government bond se- 
cured currency, that is altogether safe. Further 
expansion in that direction would tend to drive 
the specie out of the country. Obviously, then, 
the problem is that of making what we have per- 
form all functions with a minimum of friction, 
and, to that end, let us examine into credit condi- 
tions in New York as represented by bank loans 
and the basis of these loans as represented by 
cash. 

In the table which follows, I have used as 
a basis of calculation the figures showing loans 
and the extreme movements of cash into and 
out of New York Clearing House banks that 
have already been produced in the course of 
this article. Loans have been used instead of 
deposits, as the two usually correspond rather 
closely, and it is with loans we are primarily con- 
cerned ; besides, withdrawals of cash would affect 



74 Elements of Speculation. 

the deposits and produce a wrong showing. The 
results in percentages are therefore the ratios of 
cash to loans instead of reserves to deposits, but 
they can be regarded as showing, to all intents 
and purposes, the same thing as if deposits had 
been used. 

I have taken the loans as I found them in each 
year at the maximum in August, and have as- 
sumed that no reduction be made therefrom dur- 
ing the following months of September, October, 
November and December. But, wherever ex- 
pansion of loans has actually taken place in the 
months following August, the actual volume of 
loans in the month in which the expansion oc- 
curred has been taken into the calculation for 
that month and following months, except where 
there has actually been still further expansion, 
in which case the new maximum figures are used. 
By that method the years of expanding business 
during the months under consideration have been 
taken into the calculations, and, at the same time, 
those years in which there was enforced liquida- 
tion have been provided for. 

Moral Effects of the Measure. 

The table, therefore, shows what might have 
been done with the loans in the years examined if 
the national banking law permitted some flexi- 
bility in reserve requirements as applied to ''cen- 
tral reserve" banks. In all cases, excepting 1907, 
we would have been able to release cash to the 
interior with the same freedom, while at the same 
time we could have maintained the maximum 
loans of August, or even expanded them in some 
instances, without passing below the 20% mark. 
Even in 1907, which was an exceptional year in 
more ways than one, we would have come 
through without reducing loans so drastically 



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76 Elements of Speculation. 

and still we would have had left a fair margin 
over the 15% suggested for the month of No- 
vember. And, looking at the psychological aspect 
of the matter, the moral ei¥ect of such an amend- 
ment to the national banking law as has been 
suggested would have been of incalculable value 
during those troublous days, particularly if it had 
been in existence for a few years and its practi- 
cability fully demonstrated. If such a law had 
been on the statutes, no one would have felt 
alarmed when they saw reserves falling below 
25% of deposits, and they would not have ac- 
centuated the acuteness of the situation by with- 
drawing cash and hiding it away in safe deposit 
boxes and under carpets and mattresses, as was 
the case in the latter part of 1907. 

In the year 1907 the maximum cash holdings 
of New York Clearing House banks reached 
$288,000,000 in round numbers in May. In July 
they were $283,000,000. In August, they had 
dwindled to $270,000,000 and held rather close 
to that figure during September and October. 
The big drop came in November, when the mini- 
mum $215,000,000 was reached. This latter 
figure by no means represents the full drain upon 
New York Clearing House banks at that time. 
If we deduct the importations of gold during 
November, which amounted to $62,000,000, the 
decrease in cash from the July figures amounts 
to $130,000,000. As the figures stand, the de- 
crease was $68,000,000. In December, an addi- 
tional $43,000,000 gold was imported. New York 
bankers began early in the year to prepare for 
an enormous fall and winter business. The 
whole of the preceding year was one of full em- 
ployment of money in general business and in 
speculation. The 25% reserves were maintained 
with great difficulty during the last four months 



The Currency Question. 77 

of 1906, and the fluctuations in the loans were 
violent. In the early part of 1907, although cash 
holdings rose rapidly, there was a slump in them 
during February and March, and, in order to 
strengthen their position, liquidation was en- 
forced during March which reduced loans 
$50,000,000. After that, cash holdings again 
rose to above the former levels of the year, and 
fluctuated within comparative,ly narrow limits 
until the pinch came in November. 

The panic of 1907, which reached its height 
(or depth) in November, was essentially a bank- 
ing panic and was due wholly to loss of confi- 
dence on the part of the frightened depositors. 
It would have been mitigated or might possibly 
have been avoided altogether if the ''central re- 
serve" banks could have had the moral hacking 
of a law permitting a more free use of their re- 
serves in meeting the withdrawals of depositors. 
The average depositor gives very little consid- 
eration to the volume or percentage of reserves 
his bank may be carrying, so long as he is able 
to draw his cash without difficulty. Innumer- 
able instances could be cited w^here, during the 
course of a run on a bank, depositors have drawn 
their money at one window and immediately re- 
deposited it at another. In Chicago a good many 
years ago, when a run started on the banks, the 
sight of the money handed out to a depositor 
upon presentation of his pass book, impressed 
him so deeply that he asked the paying teller to 
take the money back. He was told that he must 
take the money and see the receiving teller about 
redepositing it. The institution, a savings bank, 
not only saved a lot of interest by that action, 
but also started thereby a wave of confidence 
which resulted in an abrupt ending of the threat- 



78 Elements of Speculation. 

ened disastrous run on that bank and other banks 
in the city. 

The trouble in 1907 was accentuated by the bad 
practices and subsequent failure of several bank- 
ing institutions, but even these failures and the 
effects thereof could have been minimized if the 
amendment suggested had been in force. The 
bank official no less than the depositor becomes 
timid when he faces the alternative of running 
counter to the letter of the law or taking a tighter 
grip on the hard cash in order to maintain the 
lawful reserve. And, if he cannot manage to 
retain the cash, he calls in loans, which is one 
more means of inspiring fear in the minds of the 
public. A large part of the loss of confidence in 
that year was due to the slashes in the loans 
which were made necessary by the rigid reserve 
requirements. If these reserve requirments had 
been more flexible and, consequently, little or no 
disturbance of the loans had been necessary, ap- 
prehension over the situation would have been 
lessened proportionately, and the chances are the 
banks would not have been compelled to refuse 
pa)niient in currency or to resort to the use of 
Clearing House certificates. 

It is my firm belief that we give too little con- 
sideration to the importance of maintaining bank 
loans on a fairly stable level, taking into consid- 
eration the gradual upward climb in the volume 
of the business of the country. In conversation 
with one of the active heads of a great New York 
bank, a few days ago, I was told (what every- 
body knows) that big banks do not hesitate to 
go below 25% when necessary, and he added 
that his bank at that m(oment was down to 22^ %. 
He admitted, however, that they would not 
dare take advantage of the 30 days' limit or re- 



The Currency Question. 79 

main in that condition for even one week. But 
his conclndinjT remark was quite significant, "We 
drop below 25% — for a day or two when neces- 
sary rather than frig"hten people by calling a lot 
of loans in one day." 

When the average man sees the banks calling 
loans and interest rates going up, his first and 
most natural thought is that they are losing cash, 
and that would usually be correct. If it is car- 
ried very far or too precipitately, he begins to 
wonder if his little account is safe, and it needs 
but little more to cause the uneasiness to develop 
into positive panic which leads him to the paying 
teller's window. Multiply this individual state 
of mind by thousands or tens of thousands and 
you have the making of another 1907 experience. 

If this proposed amendment providing for a 
sliding scale of reserve requirements, during the 
definitely known annual crop-moving period of 
strain, will eliminate the anxiety over loans, and, 
consequently, lessen the danger of loss of confi- 
dence, a great deal will have been accorniplished 
by its enactment. 

Possible Objections to the Measure. 

It may be argued that it would be dangerous 
to reduce present reserve requirements at any 
time, and that our "central reserve" banks 
ought to carry as large a percentage of re- 
serves as the Bank of England or the Bank 
of France, 40 or 50% or even as high as 60%. 
The answer to that objection is that, in the 
cases cited, the responsibility is centralized in one 
bank, whereas in this country, the responsi- 
bility is divided among 55 institutions. These 
55 banks have a capitalization of about $185,- 
000,000; surplus of about $163,000,000, and, ac- 
cording to the current Comptroller's report, 



80 Elements of Speculation. 

undivided profits of about $48,000,000. The 
fact that the responsibility is thus divided is 
in one sense an element of strength, for, while 
the absence of unanimity of action is some- 
times to be deplored, the policy of these banks 
is not subject to the judgment of one man or 
set of men, and their affiliations are sufficiently 
close to be a guarantee that danger in any 
single quarter will be met with practically 
united action from other quarters. Further- 
more, the functions of the Bank of England 
and the Bank of France are of a more interna- 
tional character than is the case with the 
American banks. They are also Government 
banks and hold the Treasury gold stock. 

It may also be argued that the plan is not 
sufficiently broad ; that it does not provide for 
unexpected calls upon the resources of the 
banks that may be made outside of the crop- 
moving period. That is true, but the objec- 
tion does not alter the value of its application 
to the period when we know we are most likely 
to encounter rough weather. We now have 
some of the bad spots charted and it will not 
do to disregard them because of uncharted 
rocks that may exist in the financial seas. 
In the tables and charts already submitted, 
it will be noted that the month of March is 
usually a month of strain, and it might be 
well to extend the application of the plan to 
that month also. A little further along in 
this article, another proposition will be 
advanced which will assist in taking care of 
any sudden or unexpected strain, or demand 
for currency outside of the regularly recurring 
seasonal demands. 

The objection to the general application of 



The Currency Question. 81 

this plan to all months of the year, in my 
opinion, is the absence of regularity and the 
consequent bad effect upon confidence. The 
records do not show the presence of any regu- 
larly recurring period of strain outside the 
crop-moving time, excepting the month of 
March. The strain in March does not last 
long and loans are not seriously disturbed 
thereby. The value of this plan, as I see 
it, lies in its appUcation to a regularly recurring 
period when its purpose would be fully under- 
stood by everybody, and when its application 
would be accepted with perfect confidence. 

Still another objection to the plan that might 
be made, is the fear that during the period 
when the plan is in operation, it may turn out 
that the call for money from the outside banks 
is considerably less insistent than usual, and, as 
a consequence speculators would be tempted 
to utilize the increased loaning facilities cre- 
ated by the operation of the plan. This ob- 
jection could be met by inserting a clause in 
the law prohibiting the ''central reserve" banks 
and "reserve banks" from expanding their 
loans beyond a certain percentage during the 
period when the plan was in operation. That 
would prevent the banks from fostering unwise 
and reckless speculation and from taking ad- 
vantage of the law for purposes other than 
which it was intended. This clause, however, 
should be so worded that, if the ''central re- 
serve" and "reserve banks" should see fit to 
import gold for the purpose of increasing their 
credit facilities, the prohibition with regard to 
expansion of loans would be modified in ac- 
cordance with the extent of the importations. 
In other words, so long as the banks could 



82 Elements of Speculation. 

show reserves in excess of 25%, the prohibition 
would not be considered as in force. But as 
soon as their reserves fall below 25% in taking 
advantage of the law, the loan expansion must 
stop or at least be restricted within certain 
limits. That would also provide for shipments 
of currency from the country during the pre- 
scribed period. 

A further objection that might be offered 
hinges on the proposition that usually the 
country banks draw upon the reserve centers 
for the purpose of increasing their credit fa- 
cilities as much if not more than they do for 
the purpose of obtaining an additional supply 
of circulating medium; that if additional cir- 
culation was all that was needed, they could 
utilize their privilege of increasing their na- 
tional bank note circulation, or, for that mat- 
ter, while the Aldrich-Vreeland law is in force, 
they could make use of the emergency cur- 
rency. In answer to this, I would respect- 
fully call attention to the fact that the coun- 
try banks have been exercising their privi- 
lege in the matter of United States bond se- 
cured circulation, otherwise known as nation- 
al bank notes, for a good many years, and 
that the volume of this sort of circulating 
medium has steadily expanded from about 
$200,000,000 in 1896 to over $700,000,000 at the 
present time; yet, we are subjected with ever- 
recurring regularity to the same old money 
strain, in varying degrees of intensity accord- 
ing as business is good or bad or crops heavy 
or light, year after year. The trouble with 
this sort of currency is that, once it is issued, 
it seldom comes in for redemption until it is 
worn out, and in the end, after making due al- 



The Currency Question. 83 

lowance for the natural growth of the country, 
it spells inflation. If this sort of currency could 
be recalled promptly when the necessity for it 
had passed, the evil effects of inflation would 
be obviated, but that is a measure that has not 
yet been devised to the entire satisfaction of 
all the interests concerned. Besides, the limit 
of circulation based on the Government bonds 
now in existence has been about reached, and 
emergency currency is not available except 
at prohibitive rates. So far as the need of ad- 
ditional credit facilities is concerned, when 
the country banks call for shipments of cur- 
rency, they are almost invariably supplied with 
the real article — money that is eligible for their 
reserves if it is needed for that purpose. 

While we are on this subject of national 
bank notes, let us see what a little examination 
will bring to light. 

National Bank Notes. 

It probably never will be definitely known to 
whom the credit for the first conception of a 
government bond secured currency is due. 
Neither is it entirely clear from the records 
what was the ruling motive or purpose of those 
who were responsible for its creation through 
act of Congress. Salmon P. Chase, who was 
Secretary of the Treasury in those troublous 
times, is generally credited with being the father 
of the measure which brought into being the 
present national banking system and its accom- 
panying bank note currency system. It is cer- 
tain that without his great activity in the mat- 
ter, our present comparatively satisfactory 
banking system would never have seen the light 
of day. It would either have died in the horn- 
ing or its birth delayed for many years. In a 



84 Elements of Speculation. 

space of time, which, though it must have 
seemed inordinately long at that time, was in- 
credibly short when we consider the flight of 
time since then and the opposition to the meas- 
ure, he accomplished what might easily have 
taken decades of slow evolution to bring forth. 

The idea itself was not altogether new. It 
was, to some extent, an adaptation of the sys- 
tem then in vogue in some of the States, no- 
tably New York State, whereby banks operat- 
ing under State charters were given bank note 
issuing privileges based upon security in the 
shape of State bonds deposited with the State 
Treasurer. The novelty of the idea was in its 
nation-wide application. For State bonds. Sec- 
retary Chase proposed the substitution of 
United States Government bonds, and the re- 
placement of State supervision by national su- 
pervision. The measure was thus subjected to 
more or less hostility from State authorities 
because of the possible derangement of the 
market for State bond issues. The State banks 
themselves bitterly opposed the measure on 
these and other grounds. 

But, the necessity for the measure was very 
great, and Secretary Chase eventually suc- 
ceeded in enlisting the invincible Sherman in 
the cause, and the thing was accomplished. 
The necessity which furnished the motive for 
Secretary Chase's efforts was two-fold — that of 
providing a market for government bonds for 
the purpose of securing money with which to 
carry on the war against the secessionists, and 
the correction of the intolerable evils con- 
nected with the then existing currency which 
was circulating in the guise of money. Which 
of the two considerations were the more impor- 



The Currency Question. 85 

tant at that time is difficult to determine off- 
hand. It seems, however, that successful flo- 
tation of Government bonds depended no less 
upon the standardization of the currency than 
the standardization of the currency depended 
upon its divorce from State supervision. It 
was almost impossible to raise anything but 
depreciated money for use by the Government 
except by going- abroad for it. The reason for 
this was that the State laws were so lax and so 
uncertain, and so lacking in uniformity that it 
was possible in a great many States for abso- 
lutely irresponsible persons to obtain charters 
and issue currency at their own sweet will and 
put it into circulation in other localities — money 
which even lacked the saving grace of good 
printing and engraving, to say nothing of 
value. Consequently, the people, who would 
have aided the Government with their money, 
had nothing but worthless money to offer, as 
the redundancy of worthless or depreciated 
currency had forced specie out of the country 
to a point of practical depletion. And, under 
the then prevailing conditions, the banks could 
not afford to extend aid except at rates which 
were ruinous to the Government. The act 
creating the present national banking system 
and a standardized national bank note Govern- 
ment bond secured currency was passed on 
June 3, 1864, and there it has stood ever since, 
with some modifications, up to the present 
time. It was admirably conceived to meet the 
exigencies of the day, but, in so far as the privi- 
lege of issuing bank notes produces inflation of 
the currency, we are still paying the penalty of 
the civil war. But, as an offset, we got rid of 
the war, and one of the most abominable cur- 
rency systems ever experienced by any mod- 



86 Elements of Speculation. 

ern country, and established banking upon a 
sound basis. 

Bank Note Redemption Fund. 

A recital of the various changes in the law- 
regarding the volume of bank notes which may 
be issued, the geographical distribution of the 
same, the terms on which they may be issued 
and the reserve fund to be kept on hand for 
their redemption, would consume more space 
than is available. As the law now reads, the 
banks are required to keep on deposit with the 
Treasurer of the United States a fund equal to 
5% of their national bank note issue, the 
amount so deposited to be counted in their re- 
serves. According to the current report of the 
Comptroller of the Currency this fund amount- 
ed to over $35,000,000, of which $23,000,000 
comes from the country banks, $8,000,000 from 
the "reserve" banks and about $4,000,000 from 
the "central reserve" banks. Thus, it will be 
seen that whatever advantage accrues from the 
privilege of counting this redemption fund in 
the reserves is more largely enjoyed by the 
country banks than all the rest of the banks 
together. Inasmuch as the bulk of the redemp- 
tion of these notes is between banks, there is 
no great necessity for a redemption fund, and, 
furthermore, the notes are backed by deposits 
of Government bonds which ought to be suffi- 
cient. However, I will not argue that point. 
The important point to be considered is that 
this fund is in the hands of the Treasurer of 
the United States and is doing only a portion 
of the work that it might accomplish. Reserves 
against deposits, to a certain extent, may be 
passed along from one class of banks to the 
next highest, thereby being made available for 



The Currency Question. 87 

additional work. If this redemption fund was 
treated in the same manner as reserves against 
deposits, 60% of the $23,000,000 belonging to 
the country banks could be passed along to the 
"reserve" banks, and 50% of that $13,800,000, 
together with 50% of the $8,000,000 belonging 
to the "reserve" banks, a total of over $10,000,- 
000, could be utilized by the "central reserve" 
banks. As the matter now stands, we are em- 
ploying $31,000,000 of this money in the re- 
demption fund in a most un-economical man- 
ner. Perhaps the easiest and most satisfactory 
method of dealing with this fund would be to 
leave it in the hands of the Treasurer of the 
United States and endow him with the power 
to mobilize the fund for use in any quarter 
where a stringency is threatened at any time. 
This vast sum judicially used at the right time 
and in the right place, and withdrawn at the 
proper time would provide us with a means of 
maintaining an equilibrium that would be of 
great service during out-of-season periods of 
strain. It will be remembered that $25,000,000 
poured into the money market in 1907 was the 
means of turning the tide, and stopped the 
panic which threatened to pass beyond all hu- 
man control The Government, of course, did 
a great deal more than that in the way of de- 
posits with the banks, but the efficiency of 
these deposits was lessened by the hesitating 
manner in which they were made. The strin- 
gency was allowed to become too acute before 
the corrective was administered. If the Secre- 
tary of the Treasury or some other public offi- 
cial or committee of officials had had the au- 
thority and a definite sum of money to work 
with in 1907, much of the loss of confidence 



88 Elements of Speculation. 

would have been avoided. The Government is 
in more or less active partnership with the 
banks, for it has reaped a great many benefits 
from the present system of banking and cur- 
rency, and it ought to put a representative, or a 
committee representing it, in a position to per- 
form prompt and active service at all times. It 
should extend aid at the inception of trouble, 
not at its crisis. If there is stringency in Ho- 
boken, there is the place to apply the remedy; 
it takes too long for the medicine to reach Ho- 
boken if it is applied in Kalamazoo or Podunk. 
With a sliding scale of reserves in the "re- 
serve" and '^central reserve" cities and a mob- 
ilized fund in the hands of a competent Gov- 
ernment official, much of the inconvenience and 
the danger attendant upon a rigid, inelastic 
currency would be avoided, and the chances of 
a recurrence of another 1907 would be greatly 
lessened. 



Our Foreign Trade. 89 



CHAPTER VII. 
Our Foreign Trade. 

The condition of our foreign tra'die and the 
balance created abroad by our shipments of mer- 
chandise, specie and securities is an important 
factor bearing on security prices. It is ordinarily 
tiie case that our exports of merchandise receive 
attention to the exclusion of the other items men- 
tioned, but it is imfportant that all should be con- 
sidered. 

One point which is often misunderstood and 
which causes undue apprehension in examining 
the record of exports is the gradual falling off 
in our sales of foodbtuflfs. Our foreign sales of 
grain have fallen off rapidly and will probably 
continue to do so, but that is nothing to be 
alarmed about. 

It is the history of all new countries that in 
their infancy they have sold what they produced 
from the soil and purchased manufactured goods. 
Gradually this changes until in time the process 
is reversed. In many cases lawmakers have fool- 
ishly attempted to change these conditions by leg- 
islation. England had a stormy career in this 
direction and flopped around helplessly for years 
before a clear understanding was obtained. In 
the decade from 1851 to 1860, 51.2 per cent, of 
our total imports was in manufactures and only 
21.3 per cent in raw materials for use in manu- 
factures. In 1901 24.9% of our total imports 
was manufactured goods and 45.6% raw ma- 
terials and partly manufactured goods. During 
the same period our imports of foodstuffs de- 
clined somewhat and our exports of foodstuffs 
increased. This was due to the great increase 
in farming during the half century, but that in- 



90 Elements of Speculation. 

crease has come nearer to reaching its limitations 
now and we may expect to see our exports of 
manufactures rise indefinitely with some fluctua- 
tions from time to time. The percentages follow- 
ing show the dhanges in imports and exports dur- 
ing the last decade : 

Table Showing Imports of Merchandise 1901 to 1910 
Inclusive in Percentages. 

Manufactures Raw Materials & Un- Foodstuffs 
finished Manufactures 

1901 24.9% 45.6% 28.7% 

1902 25.6% 49.9% 23.8% 

1903 25.1% 51.2% 23.0% 

1904 25.5% 48.5% 25.2% 

1905 22.6% 50.7% 26.0% 

1906 25.1% 51.7% 22.4% 

1907 25.4% 52.3% 21.5% 

1908 27.8% 46.8% 24.5% 

1909 22.8% 51.3% 25.1% 

1910 23.9% 55.3% 20.0% 

Table Showing Exports of Merchandise 1901 to 1910 

Inclusive in Percentages. 

Manufactures Raw Materials & Un- Foodstuffs 
finished Manufactures 

1901 31.8% 27.2% 39.9% 

1902 33.4% 27.5% 37.9% 

1903 33.6% 29.3% 36.5% 

1904 36.4% 32.2% 31.0% 

1905 41.0% 31.7% 26.9% 

1906 39.9% 29.1% 30.5% 

1907 39.9% 32.0% 27.7% 

1908 40.9% 30.3% 28.4% 

1909 41.0% 31.8% 26.7% 

1910 43.0% 34.4% 22.0% 

We are rapidly approaching the point when 
we will no longer be exporters of foodstuffs on 



Our Foreign Trade. 91 

balance, but our manufactures will make up for 
that. 

Cotton is the principal item in our exports of 
other than manufactured goods. It is called our 
''money" crop and so great is the revenue from 
the staple that it now makes up almost 30% (in 
dollars) of our total merchandise balance. The 
money received for our exports of cotton has in- 
creased rapidly in late years, partly because of an 
increase in production and exports, and partly 
because of a gradual upward trend in prices in 
common with all other commodities. In 1871 we 
exported less than 2,000,000 bales of cotton; in 
1881 over 3,000,000 bales; in 1891 almost 
6,000,000 bales ; in 1901 almost 7,000,000 bales, 
and in 1908 over 9,000,000 bales. In twenty 
years the average price received for exported cot- 
ton has risen from about 8 cents per pound to 
about 1 1 cents per pound. It is probable that in- 
crease in production will continue for some time 
to come, but in a slower ratio. Scientific farming 
will be added and further increase in acreage and 
larger crops will follow. As the world is largely 
dependent on us for her cotton, and as population 
is increasing more rapidly than production, it is 
not reasonable to expect any material decline in 
the price level except in the way of fluctuations. 
The trend of all commodity prices is also up- 
ward and will so continue as long as gold pro- 
duction continues to increase. One of the most 
surprising things about cotton and one of the 
greatest sources of economic waste is the practice 
of shipping raw cotton abroad and importing the 
goods manufactured! therefrom. This error will 
be cured in time. There are already evidences of 
an understanding of the situation and an attempt 
to rectify it. 



92 Elements of Speculation. 

Our exports of specie do not enter very largely 
into our trade balances as compared with mer- 
chandise exports. Since 1873 we have sold abroad 
on balance about 9 billion dollars of merchandise 
and $500,000,000 of specie. 

Our sales of securities abroad present a differ- 
ent aspect from that of merchandise and specie. 
Merchandise goes into consumption, and the same 
may be said in a modified way of specie. The se- 
curities, however, must be repaid at maturity and 
in addition to this we pay interest and dividends 
on such rented capital between the dlates of issue 
and maturity. There are no dependable statistics 
as to the amounts of our securities held abroad, 
but some of the estimates should come pretty close 
to the truth. "The London Statist" recently esti- 
mated England's holdings of our securities at 
about three billion dollars and interest thereon at 
the rate of 4.5%, or about $130,000,000 per an- 
num. The editor's estimate of the total foreign 
capital in this country is about six billion dollars. 

It is frequently the case that this large indebt- 
edness to foreigners and the consequent drain in 
the form of interest and dividends is viewed with 
alarm, and the apprehension is fostered by pessi- 
mists or radicals who have only a hazy idea of 
what such indebtedness represents. The money 
so borrowed merely represents capital employed in 
the development of our industries and resources. 
It is reasonable to assume that when a railroad 
or other great corporation places $50,000,000 of 
bond's abroad, it is because they expect to employ 
that sum to advantage, to reap enough from its 
use to pay the interest and make a profit for them- 
selves before the loan matures. In this regard it 
may be noted that we hear much talk about the 
large sums we expend annually for freights in 



Our Foreign Trade. 93 

foreign 'bottoms. To hear these agitators harp 
on the fact that we have no merchant marine and 
no laws to encourage such enterprises, one would 
think the freights paid to foreign vessel owners 
was a dead loss. An examination of the earn- 
ings of ocean transportation companies will show 
that the return on such investments is not large, 
and that under present conditions our money can 
be more profitably employed in other directions. 
When the time comes that ocean freights show a 
great enough return as compared with other en- 
terprises, we will soon have both the ships and 
the laws. 

We may classify the different items which op- 
erate against our trade balance under four im- 
portant heads : Interest and dividends, freights 
in foreign bottoms, remittances of aliens and ex- 
penditures of tourists. Estimates vary consider- 
ably, but the latest estimate at hand, that com- 
piled by Frank Fayant, is as follows : 

Interest and dividend^, about $200,000,000 

Remittances of aliens, about 150,000,000 

Freights in foreign bottoms 57,000,000 

Tourist expenditures 140,000,000 

The following tables show our imports, ex- 
ports, and trade balances of merchandise and 
specie for a period of years. 

Merchandise Exports, Imports and Balances 1901 to 
1910 Inclusive. 

Years. Exports. Imports. Balance. 

1901... $1,487,764,991 $823,172,165 Exp. $664,592,826 

1902... 1,381,719,401 903,320,948 Exp. 478,398,453 

1903... 1,420,141,679 1,025,719,237 Exp. 394,422.442 

1904... 1,460,827,271 991,087,371 Exp. 469,739,900 

1905... 1,518,561,666 1,117,513,071 Exp. 401,048,595 

1906... 1,743,864,500 1,226,562,446 Exp. 517,302,054 

1907... 1,880,851.078 1,434,421,425 Exp. 446,429,653 

1908... 1,860,773,346 1,194,341,792 Exp. 666,431,554 

1909... 1,663,011.104 1,311,920,224 Exp. 351,090,880 

1910... 1,744,984,720 1,557.819,988 Exp. 187,164,732 



94 Elements of Speculation. 

Gold Exports, Imports and Balances 1901 to 1910 
Inclusive. 





Exports. 


Imports. 




Balance. 




Gold coin 


Gold coin 


Gold coin 


- 


and bullion. 


and bullion. 


& bu 


llion excess. 


1901 . . , 


, $53,185,177 


$66,051,187 


Imp. 


$12,866,010 


1902... 


48,568,950 


52,021,254 


Imp. 


3,452,304 


1903... 


47,090,595 


44,982,027 


Exp. 


2,108,568 


1904... 


81,459,986 


99,055,368 


Imp. 


17,595,382 


1905... 


92,594,024 


53,648,961 


Exp. 


38,945,063 


1906... 


38,573,591 


96,221,730 


Imp. 


57,648,139 


1907... 


51,399,176 


114,510,249 


Imp. 


63,111,073 


1908.., 


72,432,924 


148,337,321 


Imp. 


75,904,397 


1909.., 


91,531,818 


44,033,989 


Exp. 


47,527,829 


1910.., 


. 118,563,215 


43,339,905 


Exp. 


75.223,310 



There is no intention to attempt in this chap- 
ter a long discussion of the numerous influ- 
ences bearing on our foreign trade, but the 
foregoing paragraphs are presented so that the 
reader may not be deceived from time to time 
by the numerous scareheads about our dwind- 
ling wheat exports, our payment of ocean 
freights, our annual rentals for capital, etc. 
What is particularly considered is the more im- 
mediate effects on prices from year to year, or 
even from month to month, rather than the 
economic changes of decades or generations. 

By examining the monthly documents issued 
by the Bureau of Statistics of the Department of 
Commerce and Labor, we may frequently get 
some interesting side lights on our financial posi- 
tion and the tendency to extravagance or econ- 
omy. It is found that after a long period of un- 
usual prosperity or adversity a nation does not 
dliffer much from the ordinary individual. If we 
see an individual who has rapidly built up a 
profitable business spending money freely, buying 
wines and diamonds or whatever, we are not slow 
to predict disaster, and our predictions are usu- 
ally verified. If, after such excesses and mis- 



Our Foreign Trade. 95 

takes, we see the same individual economizing and 
menddng his ways, we are ready to predict a bet- 
ter future, and again we are usually right. The 
same thing is true of a nation. I may say, in pass- 
ing, that I have often found this habit of con- 
tracting a large question to individual propor- 
tions, or of considering one share of the stock 
of a great corporation by itself instead of as a 
member of a large family, to be very helpful. 
We often become confused and amazed by an 
exhibit of figures which stagger us, while the 
proposition appears simple enough if resolved 
into smaller proportions. This process of 
diminution is purely a mental phase, but the 
contracted fact fits the head better. 

So let us look at the personal habits of Uncle 
Sam during one of his prosperous periods, and 
one of his periods of rehabilitation. A simple ex- 
ample, and the most recent, is that of the oeriod 
between 1905 and 1908. In 1906 and 1907 our 
exports of merchandise were larger than at any 
time in history, but imports expanded so rapidly 
that our trade balance did not keep step with the 
increase in exports. In July and August of 1907 
our exports only exceeded imports by a slight 
margin. Looking at the character of the imports, 
extravagance, incited by prosperity, is immediate- 
ly apparent. Let us take two luxuries for ex- 
ample, precious stones andi champagne. 



Imports of Precious Stones and Champagne for a 




Period of Years. 




Precious stones. Champagne. 


1904 . 


.$23,626,608 $4,969,635 


1905 . 


. 33,761,506 5,723,764 


1906 . 


. 40,380,762 6,127,062 


1907 . 


. 42,468,022 6,228,280 


1908 . 


. . 16,714,137 5,221.070 



96 Elements of Speculation. 

It was so in almost all lines representing lux- 
uries. Even in perfumed soaps we saved over a 
quarter of a million in 1908 as compared with 
1907. Although our exports in 1908 were not so 
large as in 1907 by $170,000,000, our trade bal- 
ances broke all records, being $136,000,000 in ex- 
cess of 1907. 

If these exhibits are examined by months in- 
stead of by years, the figures are even more strik- 
ing, for it was in the latter part of 1906 and the 
early part of 1907 that extravagance reached its 
height, and improvement began to show long be- 
fore the end of 1907. The nation acted just like 
our hypothetical individual, with the same results. 

Exports and imports of gold are not so impor- 
tant as those of merchandise, and the movements 
are as a general rule seasonal. We may naturally 
expect to ship some gold in the first half of the 
year, and import in the latter half. Danger is in- 
dicated when we are parting with our gold or 
borrowing gold abroad in a period of high prices 
and extravagance. In the panics which have fol- 
lowed such conditions we have always managed 
to get gold to relieve us, but we have always had 
to pay a high price for it. In 1906 we imported 
$108,000,000 more gold than we exported, andi 
in 1907, at the time when such imports should 
naturally have ceased and a return flow set in, 
we were in such a pickle that it was imperative 
that we import largely again. In that year we 
received $88,182,000 gold more than we exported, 
but we gained this gold by great sacrifices in our 
prices of merchandise and securities. We sold 
things for less than they were worth because we 
bad to have the money. In 1908 and 1909 we ex- 
ported about $120,000,000 more goMi than we im- 
ported, as the need for it had ended. The same 



Our Foreign Trade. 97 

thing happened in a modified manner preceding 
and following the panic of 1903, and has been in 
evidence in all former panic periods. In regard 
to gold exports, we can again bring in the 
hypothetical individual who bought diamonds 
and wine. When he is receiving gold for what 
he has to sell in excess of his expenditures, he 
is all right, but if thsi money is only temporar- 
ily in his hands, and instead of being able to 
repay it the next year, he is forced to borrow 
more, he will do so at a sacrifice. When he 
does manage to settle up, he will do better. 
That is what occurred to the nation in 1906 to 
1909. 



98 Elements of Speculation. 



CHAPTER VIII. 
Bank Clearings. 

In determining the progress of general busi- 
ness our bank clearings furnish the most sat- 
isfactory barometer. In ordinary times in- 
creases and decreases in clearings are seasonal, 
closely following the interest rates on money. The 
natural period of advancing volume of clearings 
is the latter half of the year, and they usually 
fall off during the first half of the year. Com- 
parisons v^ith a preceding year or years will 
show correctly therefore, while comparisons 
of one month with the preceding month are 
often misleading. A comparison of October or 
November, 1907, with the same months in 1906 
and other preceding years, would show a great 
falling off in business activity, and that instead 
of advancing in volume in these months, clearings 
had fallen off. This represented stagnation in 
business in the last stages of the 1907 panic. It 
was noticeable, however, that the improvement 
in business as represented by volume of clear- 
ings in 1908 began much earlier than might or- 
dinarily be expected. This recuperation began 
in February, 1908, and continued to the end of 
the year without a seasonal midyear reaction 
of any importance. The same thing was true 
in 1909, and by January, 1910, volume of clear- 
ings had reached the highest point in history. 
All through the years 1908 and 1909 it was plain 
that the lost ground of 1907 was being rapidly 
recovered and this was faithfully reflected in 
the course of security prices. 

Clearings outside of New York frequently 



Bank Clearings. 99 

fall, while New York clearings are rising, and 
vice versa; but this is usually due to natural 
causes, such as the activity during the crop sea- 
sons, etc. The best plan is to consult total clear- 
ings which are published weekly and monthly. By 
so doing we may determine whether or not the 
stories of business depression or activity are 
true. It is invariably the case, after a period of 
depression, that many people cannot and will 
not admit that business is fair and is improv- 
ing steadily and healthily. They do not rec- 
ognize the truth until the recovery is at its 
height and is so plain that it cannot be refuted. 
These people draw mental comparisons of the 
orderly betterment of the present with the un- 
due inflation of the past, or allow their views 
to be circumscribed by personal experience. 
An intelligent examination of the volume of 
clearings from time to time will show with 
remarkable accuracy the state and progress of 
business. 

In the panic of 1893 the volume of clearings 
fell off badly, as was to be expected. There 
was some desultory recovery in 1894 and 1895, 
but it was below normal and entirely unsatis- 
factory. The recovery of security prices was 
also slow. In 1896 clearings fell almost as low 
as in 1893, a very bad state of affairs as the 
volume of money employed should, of course, 
grow gradually greater from year to year. Se- 
curity prices reflected these conditions and 
reached a lower level than in 1893. It was en- 
tirely different after the panics of 1903 and 
1907. In both cases rapid recuperation in gen- 
eral business was shown by steadily increasing 
clearings and the stock market advanced in 
both cases. 



100 Elements of Speculation. 

The course of security prices and bank clear- 
ings follow or accompany each other so faith- 
fully that they may, in charted form, be super- 
imposed without any radical variations one 
from the other. The security prices show a 
moderate precession. It would be folly, there- 
fore, to buy stocks merely because clearings 
are very large, as they may have reached the 
pinnacle, in which case security prices would 
have reached their apex ahead of business con- 
ditions. What can be determined is the pres- 
ent state of general business and the stability 
and character of the growth. Improvement is 
sometimes entirely too rapid for safety — a 
mushroom growth. Sometimes a seasonal re- 
covery is only perfunctory and does not come 
up to what might reasonably be expected. On 
the other hand a seasonable decline will not be 
so great as it would be under ordinary circum- 
stances, which would show an improving trend 
sufficient to absorb a portion of the natural re- 
action. That was the case in 1908 and 1909. 

It is sometimes the case that bank clearings 
make a somewhat false showing because of ac- 
tivity or dulness on the stock exchanges. Gen- 
eral business may be slowly improving, but a 
period of stagnation in stock exchange transac- 
tions will reduce the total amount of clearings. 
On the other hand general business may have 
halted or be receding slowly, and large specu- 
lative transactions on the exchanges will ar- 
tificially swell the volume of clearings. This 
fact can be easily discovered and estimated by 
consulting the record of sales on the New York 
Stock Exchange and other prominent bourses. 

The total bank clearings by months for a se- 
ries of years are given herewith: 



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to vo cvi 00 v5 CO 

•^^ CVJ "^^^ CO 00 Oi^ 

Tf Tl-" OT Tf iO CO 



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Co" 



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> lO Q\ '■O 

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»>rO\000(^cocoO\Cv)'^ 



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102 Elements of Speculation. 

CHAPTER IX. 
Charts and Stop Loss Orders. 

The losses made annually through the following 
of charts and the employment of stop loss or- 
ders make up a very large total. In speaking 
of charts I refer to the numerous devices em- 
ployed as a basis of mechanical speculation and 
not in any way to economic charts of condi- 
tions, etc. These latter are merely convenient 
methods of picturing history and are of great 
service to the student or investigator. If we 
decide, for example, that a high ratio of loans 
to deposits, together with a low ratio of specie 
to loans is a dangerous state of affairs, we may 
more easily confirm the effect of such condi- 
tions in the past and ascertain how serious the 
effects have been, by reference to properly pre- 
pared charts than by laboriously digging out 
records from numerous volumes. In order to 
have all salient statistics bearing on price 
movements at hand we must have a library of 
many hundreds of volumes covering a long 
period of years, in which the data we require is 
concealed in a mass of other matter. Also we 
find it necessary, in the interest of accuracy, to 
check and confirm every exhibit so compiled, 
as tabulated exhibits often contain errors, and 
statistical work based on errors is worse than 
useless. By the use of a scientific and carefully 
prepared set of charts we avoid all this labor. 
The work is done for us by competent men and 
the salient statistics are visualized in the scope 
of a few hundred pages. 

But the class of charts which is criticised 
herein is an attempt, taking several different 



Charts and Stop Loss Orders. 103 

forms, to invent and successfully employ a 
"system" such as we find on race tracks or in 
gambling houses. We have yet to find a single 
instance of a considerable sum being accumu- 
lated by such methods. At times the exponents 
of chart systems have a more or less extended 
period of success, but this is usually accidental 
and is followed by reversals. 

One of the simplest and most common chart 
methods consists of drawing a picture of the 
market for a long period of years and operating 
on the theory that history will repeat itself in- 
definitely. It is a matter of common logic to 
say that the longer a merely fortuitous parallel 
is continued the nearer we are to divergence. 
The course of the stock market from 1896 to 
1902 was continually upward with only mod- 
erate reversals which usually occurred in the 
latter part of the year. This gave rise to our 
greatest crop of chart players. The demonstra- 
tion on paper looked peculiarly convincing and 
found many followers, particularly when the 
promoters were shrewd enough not to go back 
further than 1896. But alas, just as sufficient 
precedent had been found for a basic formula, 
the panic of 1903 appeared and all the golden 
dreams were dissipated. The flaw lay in the 
fact that the charts did not take cognizance of 
changed conditions. Such changes would have 
been recognized if the time spent in preparing 
charts had been devoted to a careful examina- 
tion of fundamentals instead of devising a me- 
chanical system. 

Following the downfall of the repetition 
theory as set forth above, many attempts at 
improvement in methods were made. The 
number of shares were counted from day to 



104 Elements of Speculation. 

day and it was argued that if a certain stock 
advanced steadily on total purchases of, say one 
million shares, and then hesitated or began de- 
clining, it was reasonable to assume that the 
former purchases were now being disposed of 
and that a decline would follow. This theory 
worked, as all such theories do, often enough to 
inspire the confidence of the 'believers, and it 
failed often enough to prevent profits or create 
losses. The hesitation might 'be merely a nat- 
ural plateau of prices, or might be due to some 
moderate profit taking, or to a desire to dis- 
courage undesirable followers, or whatever; in 
which case the buying and the advancing trend 
was soon resumed. 

Chart players attach much importance to 
"double tops" and "double bottoms." The 
theory in this case is that if a certain stock or 
the general market advances rapidly to say an 
average price of $100 per share, then declines 
to say $95, resumes the advance and again 
reaches $100, it is time to watch for a definite 
indication of the trend of the market. If the 
market again stops at the double top and be- 
gins declining, a considerable break may be ex- 
pected. If, however, the market continues to 
advance and goes through the double top to say 
an average of $102 or $103, it is assumed that 
the trend will continue upward, and that pur- 
chases are warranted at the high level. 

There is some elementary basis for this form 
of reasoning but it is entirely insufficient. 
When the market originally advanced to 100 
there were a good many speculative buyers 
around the top, and the decline of five points 
which followed discouraged them. The first 
thing a discouraged speculator makes up his 



Charts and Stop Loss Orders. 105 

mind to is that he will get out even as soon as 
he can and when the double top is made, there 
is frequently enough of this selling to cause 
hesitation or give a declining impetus. If such 
selling is absorbed at once and the advance con- 
tinues, it is reasoned that there is a good de- 
mand for the specific security, or for securities 
generally. To say nothing of the illogical end 
of the matter, which consists of waiting for 
higher prices before 'buying, there are two 
flaws in the theory. Both are due to its in- 
creasing popularity and use by the chart fol- 
lowers. If one man or a few men had evolved 
and followed the plan, some profits might be 
reaped, but when a horde of indiscriminate op- 
erators follow it, it defeats its own ends. Not 
only will an influx of such buying create a bad 
technical condition which will weaken the mar- 
ket and attract bearish raids, but it will lead 
important operators to help drive away a large 
and dangerous public following. It may also 
be pointed out that shrewd manipulators are 
fully aware of the growth of this popular meth- 
od and they sometimes boost prices through 
the "double top" by main strength merely to 
influence the buying which will follow. 

Finding that the mechanical action of the 
market could not be depended on, the manu- 
facturers and inventors of charts have elabo- 
rated their plans by using the stop loss order 
as an auxiliary or protective measure. The stop 
loss order is, in my opinion, an abomination in 
most cases, and a superlative abomination 
when used in connection with charts. It is a 
form of insurance which does not insure any- 
thing and is frequently productive of loss. The 
so-called stop loss order is employed in connec- 



106 Elements of Speculation. 

tion with charts in three ways : To protect pa- 
per profits already acquired; to limit actual 
losses on the original purchase or sale ; and as a 
basis for original commitments. 

In the protection of paper profits the method 
is employed as follows : A purchase is made at 
say 100. The market advances to 105. The 
purchaser places an order to sell his stock at 
say 103, which is called a "2 point stop." If 
the market declines to 103 and his stock is sold, 
he has retained a profit of 3 points. If the mar- 
ket continues to advance without reaching his 
selling price of 103 he "raises the stop." That 
is, if the price goes to 110 he will place his stop 
at 108 and so on. The term "stop loss" is ob- 
viously a misnomer in this case, but that is the 
common phraseology. 

In using the stop loss order to limit losses the 
purchaser places his selling order at the same 
time he buys his stock. He buys at say 100 and 
gives an order to sell if the market declines to 
98, on the theory that if the decline is continued 
he will lose only two points. The same thing 
of course applies to short sales. In case of a 
sale, the selling order at 100 would be accom- 
panied by a stop loss order at 102. 

As a basis of an original commitment the 
stop loss order is placed when there is no out- 
standing trade, either long or short. In this 
case the term is again a misnomer. Many peo- 
ple are not acquainted with the fact that such 
orders can be given, but they are widely used 
and are understood by all brokers. 

The chart player or theorist who believes 
that if a market goes upward into new ground 
it will continue to advance will give an initial 
order to buy if higher prices are reached. Sup- 



Charts and Stop Loss Orders. 107 

pose the former high price has been 100 and 
the ''double top" has been made. The idea be- 
ing that if the price goes to 102 the trend will 
continue upward, the speculator places a "stop 
loss" order to buy at 102 in case that price is 
reached. 

About the only good word that can 'be said 
for stop loss orders is in the case where they 
are used for protecting protfits, and even for 
such purposes it is only occasionally that their 
use is warranted. There are sometimes market 
movements whiich carry prices up to, and be- 
yond the level which should reasonably be es- 
tablished — that is to say, prices are higher than 
values. In a time of speculative excitement 
prices may continue to go upward and the spec- 
ulator may wish to continue his commitments 
in order to take advantage of this fictitious ad- 
vance. The stop loss order may prove helpful 
at such times, but it is questionable if anyone 
is justified in continuing purchases at all on 
any basis except that prices may be expected 
to advance because present or potential values 
are greater than existing prices. Under such 
circumstances a decline is inevitable, and may 
occur in such a manner as to render the stop 
loss order useless, as will be explained here- 
after. 

Stop loss orders placed with the original 
commitment, or as a purchasing order above 
the market, are intensely illogical. The only 
genuine and sufficient reason for buying a stock 
is 'because it is low in price and may be ex- 
pected to advance. This being the case, how 
absurd it appears that a purchaser should buy 
something, presumably because it is cheap, and 
immediately give an order to sell in case it be- 



108 Elements of Speculation. 

comes cheaper. Fluctuations of a few points 
are matters of weekly occurrence and have no 
bearing on the trend of the market or the ulti- 
mate price reached. The stop loss order used 
as above is the exact reverse of the scale order, 
which contemplates a purchase at a certain 
level and increasing the purchase on moderate 
declines. The scale order purchaser, instead of 
placing an order to sell on a two point decline, 
places an order to increase his original purchase 
if such a reaction appears. By so doing the 
scale order operator takes advantage of natural 
recessions while the stop loss operator suffers 
from them. If the original purchase is based on 
the only legitimate reason for buying; i. e., that 
the security is cheap and may be expected to 
advance in value and price, every little decline 
is a distinct advantage. It may be added that 
the scale order is the only mechanical method 
which appears to have any merit whatever, and 
is the only one employed by important oper- 
ators. 

The use of the stop loss order as a basis for 
original purchases conflicts with all business or 
speculative common sense. It contemplates 
waiting to purchase a security until after the 
price has advanced. (Of course the illustra- 
tions given refer to short sales as well as pur- 
chases.) If a stock is cheap at 100 why should 
we wait until it goes to 102 or 103 before pur- 
chasing? 

The whole theory of stop loss orders is fal- 
lacious ; it is obviously an attempt to attribute 
certain fixed habits to the stock market and 
operate on these habits. But the habits of the 
market are erratic and conditions are constantly 
changing. The intermediate fluctuations of a 



Charts and Stop Loss Orders. 109 

few points usually represent nothing more im- 
portant than the needs of day-to-day specula- 
tors or the plans of unimportant manipulators. 
The stop loss order, and all the other mechani- 
cal devices would work excellently if the mar- 
ket were a machine with fixed perennial move- 
ments — but it is not. 

In a majority of instances the stop loss or- 
ders are reached. That is to say if a purchase 
is made at 100 accompanied by an order to stop 
the loss at 98, the order will be executed more 
often than not. The very existence of stop loss 
orders in volume often causes a decline which 
will catch them. So popular has the use of 
this mischievous method become that the bears 
are always on the alert to "go gunning for 
stops." A recent glaring instance of this was 
on the morning following the American To- 
bacco decision by the Supreme Court. Prices 
had been advancing and hundreds of orders 
were placed to "stop losses" two or three 
points below the opening level. A concen- 
trated drive by the bears did the work in an 
hour or two; the stop loss orders were caught 
and the market resumed its advancing trend 
and reached the highest prices of the year a day 
or two later. The stop loss exponents simply 
created a condition which drove them out of 
the market at the lowest prices. 

It is the pet theory of the stop loss people 
that the market will naturally swing helow 
their stop and so enable them to repurchase at 
a lower level. If a man could buy at 100, sell 
at 98 and repurchase at 96, there would be an 
advantage, but there is no good reason to ex- 
pect that this will happen. The basic theory 
of mechanical market devices is the same as 



110 Elements of Speculation. 

that of any other gambling machine and the 
calculus of probabilities would apply in the 
same manner. I have in the past prepared ex- 
tensive figures which show that so far as prece- 
dent can enlighten us, there is no more reason 
for expecting one ten-point decline than five 
two-point declines and that therefore nothing is 
gained by the use of stop orders. 

But let me now expose the greatest fallacy of 
all. The makers of tables and charts demon- 
strating the possibilities of the stop loss order 
as a basis of speculative ventures almost inva- 
riably assume that purchases and sales can be 
made at certain fixed prices. They show how, 
in the past performances of the market, an 
order to buy might have been placed above the 
market at say 102 when the price was 100 and 
that the security then advanced to 105 and 
could have been sold at that price with a three- 
point profit. They further demonstrate that in 
many cases where the stop was placed on the 
original trade an advantage could be gained by 
repurchasing lower than the stop. For example 
a purchase is made at 100, with an order to sell 
at 98. The price declines to 96, and the stock 
is repurchased — advantage 2 points. This looks 
very well on paper, but there is absolutely no 
guarantee that these orders can be filled ac- 
cording to the program. The assumption that 
they can is wholly unwarranted in all cases. 
The first order to buy at 102 when the market 
was 100 might or might not be executed. A 
rapidly advancing market might skip the fixed 
limit entirely, sales showing at say 101^ and 
102^ with no intermediate transactions at 102. 
Sometimes the order is placed at "102 or 
higher," in which case the stock might be pur- 



Charts and Stop Loss Orders. Ill 

chased at 102^4 . I say "might" because even if 
the fixed price is touched, there might be orders 
for 1,000 shares at that price and only 100 
shares for sale, so that only one-tenth of the 
orders could be filled. 

The stop loss order placed with the original 
purchase is even more unsafe, as there are more 
possibilities of rapid and sensational declines 
than advances. A rising market is more or less 
orderly as compared with a declining market. 
An accident cannot bring about a ten-point gen- 
eral advance over night, but it can and some- 
times dose bring about a ten-point decline. 
Suppose a purchase is made at 100 accompanied 
by a stop at 98 and an order to repurchase at 
96 — there is no guarantee that any of these 
things will be done. The original price of 100 
may be touched with so little stock for sale 
that the market recovers without the order 
being filled. If it is filled at 100 the decline 
may be so rapid that the stop loss order to sell 
cannot be executed above 97, even if 98 is 
touched on the way down. If the two first or- 
ders are satisfactorily executed, and the market 
declines to 96, it may or may not be possible to 
repurchase at that price. More serious still is 
the situation where a purchase is made at, say 
100, with a stop order to sell at 98, and the 
market for the stock opens off, say 10 points 
the next morning. In this case the stop order 
would be filled at 90, and a sacrifice of the 
stock would follow at what would probably be 
nearly the bottom price. This is what hap- 
pened to hundreds of people the morning after 
R. P. Flower's death, and in many other in- 
stances. 

The exponents of stop loss orders will say 
that I am quoting exceptions and that in a 



112 Elements of Speculation. 

majority of cases orders will be satisfactorily 
executed. Granted^ — ^but these things happen 
often enough in a year's trading to completely 
destroy their pictured or tabulated exhibits, 
and to turn their theoretical profits into actual 
losses. 

In the foregoing statement a fixed mechani- 
cal rule has been assumed and no mention made 
of the mental drawbacks. If a stop loss order 
could be placed at 98 on a purchase made at 
100, and a repurchase effected at 96, all well and 
good; but how often the purchaser becomes 
disturbed and confused by the spectacle of rap- 
idly declining prices and fails to carry out his 
plans. The market always 'looks weak" when 
it is declining, and declines are always accom- 
panied by wild stories and predictions which 
are usually the result of the decline rather than 
the cause of it. It is cold comfort to see a stop 
order executed at 98 and in a few days find the 
market much higher with no stock on hand. 
The "stop loss" order has proven to be a "make 
loss" order. 

Contrast the results of the scale order as ap- 
plied to the above illustration. Scale orders are 
not always executed when the limits are barely 
touched, but in case of a heavy decline over 
night there is an advantage instead of a draw- 
back, as the intended line is purchased at a 
lower level than was originally contemplated. 
The scale order properly used, seldom results in 
failure. If v^e are satisfied in the first place that 
the security purchased is cheap, and the piros- 
pects good, a decline is an advantage instead 
of a disaster. 

Speculators would be better off if all the 
mechanical methods in existence had never been 
invented. 



Mental Characteristics. 113 



CHAPTER X. 
Mental Characteristics. 

It appears strange that the mental characteris- 
tics of speculators or investors should be a con- 
tinual source of needless worry and actual loss, 
but the fact that it is so, is incontrovertible. 

The mental attitude of speculators during panic 
periods is responsible for about as much loss, 
in a negative sense of the word, as is the lack 
of funds. People who see great bargains litter- 
ing the Wall Street counters, and who have every 
reason to know that they are bargains, become 
confused and frig*htened by the declining prices, 
the bank failures and the words of pessimists, 
and fail to take advantage of unprecedented or 
unusual opportunities. They become obsessed 
with the idea that the whole business structure is 
going to pieces ; that the mills, factories and rail- 
roads will cease to operate, and tihey look back 
through history for the worst precedents they 
can find and draw comparisons regardless of the 
fact that basic factors may be entirely different. 
It is a well-known fact that public venturers or 
investors seldom buy near the bottom. The 
stocks are accumulated by the wise minority at 
such times and are resold to the public later on 
at much higher prices. Per contra, when prices 
are high and business is booming, there is a spirit 
of mental exhilaration in the air and ill-advised 
purchases are numerous. 

So strong is the human tendency to become 
depressed when prices of securities are depressed, 
and to become stimulated when prices are high, 
that the majority of operators find it impossible 



114 Elements of Speculation. 

to carry out their preconceived plans, no matter 
how reasonable and correct such plans may be. 
An individual, looking over the history of secu- 
rity movements, will sometimes make up his mind 
quite correctly that in every period of panic won- 
derful opportunities occur in the securities mar- 
kets and that when business is good and prices 
are high, we may expect another reversal sooner 
or later. Realizing all this, he makes up his mind 
to await such an opportunity — to buy when no 
one else wants to buy andi sell when no one else 
wants to sell. A very wise plan. But when he 
is confronted by the actual conditions for which 
he has waited, he will in nine cases out of ten 
abandon his plans. 

And this indecision is not confinied to the long 
swing operators. It is even more prevalent and 
pronounced in the case of active speculators or 
investors who enter the market frequently. Sev- 
enty-jfive per cent of the orders placed by specu- 
lators to buy or sell if certain prices are reached, 
are Cancelled whenever the market approaches 
their prices. Ldt me again refer to the recent 
American Tobacco decision as an illustration of 
this propensity. In the few weeks preceding that 
decision there were marked evidbnces of basic 
improvement in the general situation. Crop pros- 
pects were excellent, and the only bar to advanc- 
ing prices was the uncertainty over the Supreme 
Court's construction of the Sherman law. A great 
miany people reasoned about as follows : 

If the construction placed on the Sherman law 
in this case is not revolutionary and confiscatory, 
the uncertainty will be removed, and even if the 
American Tobacco Company is found guilty, 
good corporations will not suffer. Fundamental 
conditions lare such that we should have a better 



Mental Characteristics. 115 

market and hig'her stock prices. If the decision 
is against the company we may expect an initial 
decline of a few points, as the purport of the de- 
cision will not be fully understood at once, and 
some frightened selling will ensue. On such a de- 
cline, stocks will be an excellent purchase. That 
is the way they reasoned and they were absolutely 
right. A great many orders to buy a few points 
under the market were placed with brokers. The 
next morning the market began rapidly declining 
and many of these buying limits were reached 
But at the first sign of demoralization market- 
wise, cancellations began pouring in and only a 
small percentage of the OTd-ers was executed. In 
short, these people figured out what might natur- 
ally be expected to happen, and how it might be 
used to the greatest advantage; that very thing 
did haptpen exactly as expected, and they would 
have none of it. This kind of vacillation is very 
bad. It is largely due to too close attention to 
the ticker. Ordinary fluctuations are greatly 
magnified in importance when every little change 
is watched. As has been stated, the market al- 
ways "looks weak" wihen it is dieclining, and 
"looks strong" when it is advancing. Consequent- 
ly it alternately looks weak or strong half a 
dozen times a day. Propinquity of this charac- 
ter is seldom an advantage except to professional 
scalpers, and is a fertile source of confusion and 
loss to the rank and file. 

It is the same way with the scale order. A 
man makes up his mind that a security is cheap 
and that its prospects are bright. He wishes to 
make some allowance for errors in calculation 
or natural market action, so he decides to intro- 
duce a scale order, to buy say every two points 



116 Elements of Speculation. 

down until his intenidedl line is accumulated. Now 
the only way the full line can be accumulated is 
by a decline. That is the basic theory of the 
method, and a decline is necessary and desirable. 
If we start buying on a scale at, say, loo, with 
orders to buy at 98, 96, 94, 92 and 90, and these 
orders are all filled, the average price would be 
95 for the entire line. When the price returns to 
the original point (100) there is a five-point profit, 
while if the whole had been purchased at 100, no 
profit would) be shown. But knowing and ap- 
preciating all this, the plan mapped out originally 
is seldom' pursued to a conclusiion. The spectacle 
of falling prices (which were anticipated as being 
possible or probable, and also desirable) is too 
much for the venturer. He cancels his orders in 
the fear that the bottom will fall out of the mar- 
ket or he doubles his purchases in the beHef that 
he will not get his desired line. If the market ad- 
vances from the original purchase he is not con- 
tented to reflect that he has acted in the interests 
of safety and to be thankful for moderate gains, 
but is incensed because he has not made more, 
anidi this often leads to increasing purchases on 
an advance which is just the reverse of what he 
set out to do. 

Speculators and investors are almost certain 
to exaggerate the importance of events or news 
items bearing on security prices, and on the other 
hand to ignore or underestimate the importance 
of fundamental factors. The development of 
basic conditions is slow and requires constant at- 
tention, therefore the study is usually neglected. 

If the dividend on a security is reduced or 
passed) for any reason, we are bound to hear pre- 
dictions of similar forthcoming reductions in 
many quarters. The action may be for a specific 



m 



Mental Characteristics. 117 

reason in no way affecting other securities or 
may be a gxx)d business move, but that does not 
matter to the traders. They do not stop to an- 
alyze or segregate the case. Visions of wholesale 
reductions appear, and the visions are soon con- 
verted into verbal expressions of opinion; the 
verbal utterances grow into predictions and pre- 
dictions develop into "information." A dividend 
reduction for a good and specific reason affecting 
no other corporation usually winds up inside of 
twenty-four hours in *'We hear on good author- 
ity" statements attacking the stability of other 
corporations. 

In reading crop reports, earnings, statements 
or whatever, this same slipshod superficial rea- 
soning or apprehension is constantly in evidence. 
The only way this evil influence can be avoided 
is by keeping so well posted that we may know 
what to expect or be able to intelligently weigh 
the purport of unexpected news. A day's mar- 
ket gossip would fill a volume, and all that is of 
value in it would not ordinarily fill a page. 

Political issues are constantly made a source 
of agitation land worry in the speculative world. 
In nine cases out of ten the results of important 
changes in laws or methods are beneficial to the 
country as a whole and to the stockholder or 
speculator. It is hard to find a flaw in the actions 
of the Interstate Commerce Commission since 
that body was organized. We have better and 
more uniform reports of railway earnings and 
operations than ever before, and the only time 
the railroads have been refused a request, it has 
been found that such request was unreasonable 
or that the necessity for the demands was misrep- 
resented. It did appear a few years ago that with 
the prices of commodities and labor advancing 



118 Elements of Speculation. 

without corresponding advances in the price of 
transportation, the railroads were in a bad posi- 
tion, but when it came down to an actual test of 
the facts as brought out by the recent rate case, 
it was shown that the only material increase was 
in the cost of labor, and that materials used in 
construction and price were in most cases lower 
than in the past. Great savings had also been 
effected through increased car and train load ca- 
pacity, improved grades and more efficient man- 
agement. The railroads made a strong case, but 
it was not strong enough. After all was said and 
done it was found that they were in a better gen- 
eral position than at any time in history, and 
that the return on railroad securities was larger, 
dollar for dollar, than it had ever been before. 
Therefore, the demands were justly refused. We 
may be sure that if the time ever comes when 
an advance in rates is necessary to a fair return 
on investments, the advance will be granted. 

There is always some kind of political agiitation 
going on and when a decline in securities or gen- 
eral business occurs, it is popular to attribute it 
to politics. A case in point was the panic of 1907. 
People who did not foresee or recognize the over- 
strained credit conditions, our extravagance, and 
a dozen other fundamental factors which brought 
about that panic, cast about for something tangi- 
ble on which to lay the blame. They found it in 
the political agitation. Such agitation had been 
going on for years and had no power to either 
make or prevent the crash of 1907. It is true 
that unwise ranting somewhat aggravated the 
trouble in its last stages, as such strictures were 
ill-timed and increased the apprehension of a mul- 
titude which was already badly frightened, but 
this was at best only a contributory reason, even 



Mental Characteristics. 119 

as applied to the final spasm. The last throes 
of the panic were due more to money conditions 
than to anything else. 

It is only when some great issue is pending 
that politics have power to radically change the 
natural course of security prices for any length 
of time. The silver agitation was a serious fac- 
tor marketwise, but it is questionable if another 
such issue will ever be presented. The tariff is 
the bugaboo at present, but a radical change in 
this regard would have a very mixed effect on 
security values and prices, and would not pre- 
cipitate a panic. Some corporations would be 
injured, others would be benefited and we are 
bound to assume until it is otherwise proven by 
a sufficient lapse of time, that tariff changes would 
be beneficial to the country as a whole, and 
consequently to its security issues. 

Every year we raise a crop of agitators, some 
honest and correct in their views and some work- 
ing only for political advancement or aggrandize- 
ment, regardless of the merits of their propa- 
ganda. The latter come to Washington, squib 
off their verbal firecrackers for the edification of 
prejudiced or unthinking constituents; get their 
Culminations spread on the records and go home. 
They do no harm, so far as the market for secu- 
rities is concerned. We have had them with us 
since the constitution was signed and we will al- 
ways have them with ps. They are harmless, but 
they are disconcerting to the timid public in- 
vestors or speculators. If they had never existed, 
or had existed in greater numbers for the last 
twenty years, the average level of security prices 
would in all probability not be appreciably differ- 
ent from what it is today. 

Of the numerous mental failings, it is probable 



120 Elements of Speculation. 

that greed is the most prolific mother of loss. It 
leads to over-speculation, to rash operations re- 
gardless lof the merits of securities, and to dis- 
satisfaction with what has heen gained. In re- 
gard to the latter phase of the question, it is 
rather astonishing to see a man pocketing a profit 
which would have been considered very large, 
considering time and capital employed, in any 
other business on earth, cursing his stars flu- 
ently because he did not make more. It is very 
easy to look back on the possibilities after it is all 
over and indulge in retrospective speculation, but 
these tentative operations could never have been 
undertaken if the factor of safety had been prop- 
erly conserved and such retrospects are chimer- 
ical. They are about as reasonable and about as 
productive of profit as looking back over the 
records of numbers established in a game of roul- 
ette and figuring how much would have been won 
by betting on lall of them. This mental state has 
one bad effect. It encourages people to over- 
reach themselves in future operations and so even- 
tually becomes productive of loss. 

There are many other fallacious mental char- 
acteristics which retard, dlisturb and mislead the 
speculator and investor, but a remedy for these 
drawbacks may all be covered in one prescrip- 
tion. Make up your mind what you are going 
to dlo and why you are going to do it. Be sure 
your original premises are correct; keep posted 
as to changes or developments; pay no heed to 
fluctuations or *'tips." Disregard every bit of 
gossip masquerading as news, except what is 
genuinely informative and based on good author- 
ity; do not be moved from your position by 
canards, incompetent advice or anything else 
short of an actual change in the conditions on 



Mental Characteristics. 121 

which }'Our actions were originally based; be 
satisfied with reasonable returns, and learn to 
accept a loss quickly if your plans are upset by 
miscalculations or adverse developments ; and re- 
member that the market, with fresh opportunities, 
will be doing business at the same old stand to- 
morrow, and next week, and next year. 



122 Elements of Speculation. 



CHAPTER XL 

The Future of Our Railroad and Industrial 
Securities. 

The long future of our securities is a question 
of great importance to the speculator as well as 
the investor. Even if we are operating only for 
the shorter turns of a year or less, it is a distinct 
advantage to be working with the cur- 
rent instead of against it. If a man 
buys a security with a well based opinion that it 
will eventually be worth more than its present 
selling price and is disappointed in the immediate 
movement of the stock, he can rest easy in the 
knowledge that at some time in the future his 
profits will appear. Intermediate paper losses 
do not seriously affect him unless he has com- 
mitted the sin of over-speculation. 

The progress of some of our leading railroad 
stocks in the past two decades reads like a Gol- 
conda romance. Atchison, Topeka & Santa Fe 
sold under foreclosure in 1895 at $3.50 per share; 
Baltimore & Ohio in the same year at $32.50 per 
share ; Canadian Pacific at $33 per share ; Jersey 
Central at $81.50; Chesapeake & Ohio at $12.50 
per share ; C, B, & Q. at $69 per share ; Chicago, 
Milwaukee & St. Paul at $53.87 per share; Chi- 
cago & Northwestern at $87.37 per share ; Louis- 
ville & Nashville at $39 ; Northern Pacific at $2.50 
per share; Reading at $15 per share; Southern 
Pacific at $16.75 per share; Union Pacific at $4 
per share, and so on through a long line of oth- 
ers. It may be suggested that this was in a period 
of panic and unusual opportunities, which is true 
enough, but if we go back only one decade and 



Our Railroad and Industrial Securities. 123 

consult the progress since that time, the presen- 
tation is still remarkable. Prices of the stocks 
named above were as follows in the year 1900 
Atchison, $18.62; Baltimore & Ohio, $55.25 
Canadian Pacific, $8475; Jersey Central, $115 
Chesapeake & Ohio, $24 ; Chicago, Burlington & 
Quincy, $119; Chicago, Milwaukee & St. Paul, 
$108.50; Chicago & Northwestern, $157.50; 
Louisville & Nashville, $68.25 ; Northern Pacific, 
$45.75; Reading, $15; Southern Pacific, $30.37, 
and Union Pacific, $44.37. 

In calling attention to this remarkable growth in 
an address delivered before the Finance Forum of 
New York in 1910, I was asked by a gentleman in 
the audience if, in my opinion, such opportunities 
existed today or would ever exist again. I had 
no hesitation in replying in the affirmative. It 
goes without saying that the opportunities shown 
in the stocks mentioned will never be presented 
again, but some of our railroad stocks which are 
now kicking about the street paying no dividends 
will in the fullness of time duplicate the per- 
formances of what are now known as our gilt- 
edged railroad stocks. The bold statement that 
such stocks as Erie, Missouri Pacific, et al, will in 
time sell as high as Union Pacific or Great North- 
ern would be more likely to be met with ridicule 
than with respectful attention, but in that regard 
it may be pointed out that the man who ten or 
fifteen years ago had predicted the present prices 
of Union Pacific, Atchison or Great Northern, 
would doubtless have been considered a sub- 
ject for an inquirendo lunafico. With the steady 
growth in population, the increased efficiency and 
improved management of railroad properties, we 
may expect to see many securities which are now 
despised taking front rank in the speculative 



124 Elements of Speculation. 

list. Meanwhile our present market leaders will 
have become seasoned investments and will have 
practically passed from the street, as has been 
the case with Delaware & Lackawanna, Chicago 
& Northwestern and other erstwhile active stocks. 

We cannot learn much about this long swing 
of prices from an examination of statistical ex- 
hibits. The statistical condition of Atchison or 
Union Pacific could not have been very hopeful 
when they were sold under the hammer. What 
must be depended on is the long future of the ter- 
ritory traversed. We may, however, obtain help 
from statistics in choosing our prospective bar- 
gains by watching the course of improvement in 
financing and managing, and so make the original 
purchases under promising conditions and pros- 
pects. 

Taking up first the long future of our rail- 
roads as a whole, we find much that is very en- 
couraging. Let us examine a few of the salient 
points. The principal bugaboo at present is the 
cry of over-capitaliation. iConsidered as a whole, 
our railroads are not over-capitalized. Recent at- 
tempts at physical valuation by certain states 
have gone far toward establishing that fact. The 
so-called physical valuation made by Texas and 
Michigan may be cast aside as worthless. No 
statistician of ability would accept their figures 
seriously. The Texas valuation was based on 
the year 1895, which in itself is sufficient to 
damn it. No pretence of thoroughness is shown 
in the Michigan figures of 1900. Aside from 
these, the physical valuation made by the State 
of Washington in 1905 gives the cost of repro- 
ducing railroads in that State at $194,000,000 
(in round numbers) ; the present value at $176,- 
000,000 and capitalization at $167,000,000. Min- 



Our Railroad and Industrial Securities, 125 

nesota in 1907 gave cost of reproduction at $412,- 
000,000 ; value at $360,000,000 and capitalization 
$335,000,000. Wisconsin in 1909 gave cost of 
reproduction $297,000,000; value $241,000,000 
and capitalization $249,000,000. South Dakota 
in 1908 gave cost of reproduction $106,000,000; 
value $92,000,000 and capitalization $139,000,000. 
Professor Dixon of the Bureau of Railway Eco- 
nomics at Washington threw out the Texas re- 
port as worthless and reduced the Minnesota 
capitalization to $300,000,000 because of obvious 
duplications. South Dakota also showed dupli- 
cations by including a share in terminals at St. 
Paul and Chicago. Subtracting these, the South 
Dakota capitalization would be $109,000,000 in- 
stead of $139,000,000. The Wisconsin board in- 
cluded in their physical valuation about $25,- 
000,000 of the Chicago, Milwaukee & St. Paul's 
investment in the Chicago, Milwaukee & Puget 
Sound extension, which had already been charged 
to other States. Deducting this, the Wisconsin 
figures would be $224,000,000 instead of $249,- 
000,000. 

An examination of these estimates made by 
detached States shows so many duplications and 
errors of calculation that the whole affair is a 
jumble of incoherent figures, which are natur- 
ally biased in order to increase state taxation. 
The only way we will ever arrive at a reasonable 
physical valuation is to have the Government take 
the matter up and perform the work uniformly 
and scientifically. 

By comparison with foreign countries our capi- 
talization per mile is very low. The railroads of 
the United Kingdom show capitalization of $274,- 
964 per mile; Germany, $111,737 per mile; Rus- 
sia, $79,136 per mile; France, $141,920 per mile; 



126 Elements of Speculation. 

Austria, $115,130 per mile, and Italy, $125,205 
per mile. The per mile capitalization of all Euro- 
pean roads averages $126,859 per mile of line. 
This would be considerably decreased by figuring 
on per mile of track, as the United Kingdom has 
more than twice as many miles of track as miles 
of line, while the United States has only about 
one-third more, but figuring any way we please 
and making all allowances, the railroad capitaliza- 
tion of the United States, which is $58,316 per 
mile of line and $40,860 per mile of track, is very 
low as compared with other countries. Even 
our next door neighbor, Canada, has a per mile 
capitalization of $64,740. 

In the last decade the net capitalization per mile 
of line of all railroads in the United States has 
increased a trifle over 14% (not 14% per annum, 
but for the entire period). In the same time net 
earnings per mile have increased 43.7% and the 
ratio of expenses to earnings has increased 2.2%. 
The average tons to the train load has increased 
in the ten years 40.9%. The larger train loads 
are a great economical measure and go a long way 
toward offsetting the higher compensation paid 
employees. According to the railroad statistics 
offered for popular consumption, the compensa- 
tion paid to employees has increased 103% in the 
last decade, but this statement has been frequently 
so presented as to lead to the opinion that it means 
that wages have doubled, which is far from being 
the truth. The joker is in the omission of the 
word *'all." What is really shown is that the 
amount of money paid to a greatly increased 
number of employees has increased 103%. In 
the decade, the number of employees per mile has 
increased 38.5%. Whatever the railroads may 
claim about the cost of running railroads ten 



Our Railroad and Industrial Securities. 127 

years ago as compared with today, they cannot 
get behind the fact that the ratio of expenses to 
earnings has only increased 2.2% in ten years or 
at the rate of 0.22% per annum. And it may be 
said in passing that much of this increase is 
probably due to bookkeeping, as it is impossible 
to prevent accountants from charging to mainte- 
nance items that should be charged to improve- 
ments or new construction and so pass into capi- 
tal account. If, for example, ten miles of track 
is washed away and is rebuilt on a new grade 
over new ground, the railroad can charge it to 
replacement or new construction according to 
their own sweet will. It does not seem reason- 
able to assume that in the recent efforts to make 
a bad mouth the railroads would fail to take 
advantage of this method of accounting so far 
as possible. 

In the above figures of increase in ratio of op- 
erating expenses, I have taken the figures offered 
by the railroads themselves in the seventh annual 
statistical number of the Bureau of Railway 
News and Statistics. They do not square with 
the figures given by independent statisticians. 
Poor's Manual gives the ratio of expenses to 
earnings in 1901 as 68.93 and in 1910 as 66.09. 
The figures given by the railroads of percentage 
earned on net capitalization are also confusing 
and misleading so far as the progress of stock 
securities is concerned. They bulk all capitaliza- 
tion, bonds, notes and stocks, and show that they 
are earning no more on net capitalization than 
they were 20 years ago. But when we examine 
these figures in detail, we find that the interest 
rate has fallen rapidly in that period while the 
dividend rate has been rising. This may not 
please the buyer of bonds, but certainly the holder 



128 Elements of Speculation. 

of stock securities can find no fault with such re- 
adjustment. Over half the total capitalization 
of our railroads is in the bonded debt, and it is 
obviously to the advantage of all concerned to 
borrow such capital cheaply. Here are the fig- 
ures for twenty-eight years as given by Poor's 
Manual : 

Table Showing Average Rate Per Cent, of Interest 

and Dividends on Bonds and Stocks of 

All United States Railroads — 1883 

to 1 9 10 Inclusive. 

Interest Dividends Interest Dividends 

Aver, rate Aver, rate Aver, rate Aver, rate 

1883. .4.94 2.76 1897. .4.24 1.51 

1884. .4.82 2.50 1898. .4.21 1.71 

1885. .4.97 2.00 1899. .4.26 1.92 

1886. .4.86 2.02 1900. .4.27 2.44 

1887. .4.86 2.17 1901. .4.24 2.65 

1888. .4.48 1.80 1902. .4.10 2.97 

1889. .4.53 1.79 1903. .4.17 3.03 

1890. .4.44 1.82 1904. .4.01 3.31 

1891. .4.41 1.87 1905. .3.79 3.27 

1892. .4.25 1.93 1906. .3.99 3.63 

1893. .4.31 1.88 1907. .3.87 3.73 

1894. .4.19 1.66 1908. .3.88 3.50 

1895. .4.24 1.58 1909. .3.87 3.68 

1896. .4.45 1.52 1910. .3.79 3.64 

While we are not nearing the end of railroad 
construction in the United States, the building of 
new lines and opening up of new territory will 
not be so rapid from now on. This will greatly 
enhance the value of the existing roaas, par- 
ticularly those traversing the least developed and 
most sparsely populated territory, that is to say, 
the Northwest and Southwest. The roads cov- 
ering such territory have been called on to spend 
enormous sums in reducing grades, shortening 



Our Railroad and Industrial Securities, 129 

routes and improving roadbeds and terminals. 
As population increases we will find from now on 
that a great deal of the increased demand for 
transportation facilities "v^i^l ^^ provided by 
double tracking, and double tracking is the most 
profitable of all railway construction. It will be 
a long time before any great amount of new trunk 
line construction will be necessary. Of course 
the growth and prosperity of Western roads will 
materially increase the traffic and earnings of 
Eastern lines, but the greatest benefit will ac- 
crue to properties of the Northwest and South- 
west. 

The future of our industrial securities is not 
so clear as that of the railroads. They are a 
mixed lot, and, as a group, are comparatively 
new. They are also comparatively low in price. 
The greatest reason given for avoiding industrial 
securities is the fear of tariff changes or hostile 
legislation. Personally, I do not think this ap- 
prehension is well founded. The laws will even- 
tually drive evil out of corporate combinations of 
capital, and in so far as a corporation has been 
gaining by corrupt or high-handed practices, it 
will suffer. Also, when a corporation thrives be- 
cause of a ridiculously high tariff, its future is 
endangered, but there is no necessity for choos- 
ing securities whose prosperity is based on such 
temporary emoluments. There are plenty of good 
industrial stocks with clean records and bright 
prospects. Most of the industrial preferred secu- 
rities have excellent dividend records and are the 
cheapest of all semi-investment stocks. It is 
not the purpose, in this chapter, to offer specific 
recommendations, as changes might occur at 
any time to warrant a modification or reversal 
of opinion, but an examination of the reports 



130 Elements of Speculation. 

and statistics of some of the oldest industrials 
will show that they have greatly enriched 
their holders and maintained dividends in the 
face of legislative attacks, or even when mod- 
erately affected by tariff changes. In its in- 
cipient stages every new industrial security 
has passed through a baptism of fire and large 
numbers of people who want something new 
and who brush aside opportunities in the 
seasoned securities in the same group, in 
order to get in on the ground floor of a new 
flotation, are crippled by their actions. They 
usually get in on the roof and fall off. A large 
combination is usually over-capitalized at the 
start, as it is necessary to pay fancy prices for the 
competitive properties purchased. Many prop- 
erties so purchased are in a poor physical state, 
and much money is necessary to bring them up to 
the standard. The management is also in a more 
or less confused state at first, and the whole com- 
bination, while it may be theoretically correct, is 
in an embryo state. I regret to add that in many 
cases the promoters take advantage of the public 
tendency referred to and sell them stock at prices 
which are too high. In the course of time, the 
over-capitalization is absorbed, the plants are up 
to date, the managerial machinery is well oiled 
and the stocks, disgorged by the idisgusted public, 
are low in price. At such a time industrial stocks 
present great speculative opportunities, but the 
same public which was so enthusiastic at the be- 
ginning will not accept them as a gift. We can 
look back over the statistical records of the past 
decade and find dozens of such cases, not differ- 
ing in any way from the hypothesis offered above. 
One drawback to operations in industrial se- 
curities is the lack of comprehensiveness and 



Our Railroad and Industrial Securities. 131 

uniformity in their published reports. Some 
of them are mere balance sheets and tell little 
or nothing. Some of the larger corporations, 
however, are publishing annual reports which 
are as clear and complete as any railroad re- 
port. It is to be hoped that other corporations 
whose stocks are held by the public will see fit 
to accept such documents as models and reform 
their methods of publicity and accounting. 
Failing in this it is to be hoped they will be 
required to do so by our law-makers as was 
the case with the railroads. Probably nothing 
would contribute to a speedy reform in this 
direction so much as a refusal on the part of 
the public to participate in blind pool flotations. 
It is good policy to take that stand at any rate. 
A stockholder is entitled to full knowledge of 
the undertaking in which he is a partner and 
there can be no reasons for concealment ex- 
cept ulterior ones. 

In a few years some of the industrial pre- 
ferred stocks which now show a large income 
return will pass into the hands of investors at 
materially higher prices. When confidence in 
the stability of their dividends is assured such 
securities should sell on a basis to yield about 
S%. A seven per cent, preferred industrial 
stock, of which there are a number, would be 
on a five per cent, basis selling at $140 per 
share. There is a maxim in financial circles 
that an industrial security should pay a higher 
return on money than a railroad security, but 
this should not apply to preferences with a 
large margin of safety. The fluctuations in 
dividends on common stocks are more frequent 
than on the preferences and in many cases the 
dividends on preferred issues are ''cumulative," 



132 Elements of Speculation. 

that is to say, all deferred dividends must be 
made up to the holders of preferred before the 
common issues receive anything. 

Another point in favor of the industrial stocks 
of both classes is the very small percentage of 
bonded indebtedness. This permits them to go 
through lean periods more easily than railroads 
or other corporations having heavy fixed charges, 
and gives an added book value to the junior 
issues. 

The desires and intentions of different people 
and the specific influences bearing on different se- 
curities render it impossible to lay down a rule 
of thumb as to just what should be purchased for 
the most satisfactory results. A rough formula 
which will cover most cases would be about as 
follows : 

For the most stable income with chances of 
moderate appreciation in value, the high priced 
rails having a good dividend record covering a 
long period of years, a low ratio of expenses to 
earnings and low fixed charges. 

For a somewhat larger income return and 
better chances of ultimate appreciation in value, 
but with less safety, the industrial preferred 
stocks having a good dividend record. Choose 
the stocks which are not likely to be seriously 
affected by legislation or tariff changes. To this 
group, I would add the common stocks of public 
utility corporations, gas, electric lighting and 
water. The traction group is not so good, par- 
ticularly the securities of urban traction lines, 
as they find it very difficult to keep down ex- 
penses or advance fares and are constantly get- 
ting into litigation. 

For greater speculative chances, with the safety 
of income reduced, the middle priced railroad 



Our Railroad and Industrial Securities. 133 

common stocks which show low fixed charges, 
good management and a brilliant future from 
territorial expansion. This group, which is com- 
prised mainly of Northwestern and Southwest- 
em roads, presents, in my opinion, the greatest 
speculative promise, together with the greatest 
certainty of future income return. 

For speculative chances regardless of income 
or immediate dividend returns, the low priced 
rails, particularly such as are low in price be- 
cause of bad management, bad financing, etc., 
but which have good future possibilities through 
territorial expansion. Whether we buy one of 
these low priced railroad stocks for any of the 
reasons given or for all of them, statistics will 
not help us much. They will be the best bargains 
when their statistical exhibits are the worst. 
We must depend on improved management and 
financing and natural growth. It is reasonable 
to assume that when a good property or group 
of properties is neglected or mismanaged for 
years, something will be done to rectify these 
conditions. If nothing is done voluntarily, it 
will be done automatically by a receivership. The 
reader will instantly revert to one group of prop- 
erties in reading the above paragraph, so I will 
not need to name it. 

The low priced industrial common stocks may 
also be considered as offering great speculative 
opportunities. It is necessary to employ unusual 
discrimination in choosing these issues. In some 
cases the business of industrial corporations fluc- 
tuates so tremendously that dividends are never 
assured for any length of time. It is a common, 
and frequently a fatal error to look at the earn- 
ings and progress of a year or two and form 
conclusions accordingly. 



134 Elements of Speculation. 



CHAPTER XII. 
Speculation in Commodities. 

The amount of money lost in speculation in 
commodities has been much greater proportion- 
ately than that lost in securities. An exhaustive 
examination of 500 speculative accounts oper- 
ated in the years 1901, 1902 and 1903 revealed 
412 commodity accounts that showed a loss ; 74 
a profit and 14 were neutral. This would be very 
much changed for the better by an examination 
of an equal number of accounts covering any 
period during the last five years. There are two 
reasons for this — ^first, that the trend of all specu- 
lative commodity prices has been upward, and, 
as the public operates on the long side in a ma- 
jority of cases, they would have been favored 
in their ventures. Second, and more important, 
is the fact that a number of shrewd men have 
arrived at a somewhat tardy recognition of a 
gradual but steady advance in the prices of com- 
modities which continully shifts the normal price 
to a higher basis. They realize that a price for 
wheat, corn or cotton which would have ap- 
peared high a few years ago is low now. Prior 
to the recognition of this upward trend they were 
floundering around in the dark and drawing 
wholly incorrect comparisons and deductions. 
They did not know when wheat or corn or cot- 
ton was cheap or when it was dear. Further- 
more, the cause of this gradual readjustment of 
prices to a higher level was not understood, and 
consequently they did not know when it would 
cease, or when the trend might be reversed. This 
finally led to the only reasonable method of solv- 



speculation in Commodities. 135 

ing the problem, i.e., an assiduous search for the 
cause of the change. After this study had been 
brought to a satisfactory conclusion, it changed 
the whole aspect of commodity speculation, and 
more fortunes have been made and retained in 
cereal and cotton speculation in the last five years 
than at any time in history. It is needless to 
state that the important operators v^ho worked 
on that theory did not advertise it from the 
housetops. They did not in any way relax their 
investigations as to crop prospects, exports or 
any of the other factors bearing on intermediate 
price changes, but in addition to the advantages 
of such knowledge they operated on a lazv gov- 
erning the long swing of prices, and this enabled 
them to swim with the current at all times. If 
their deductions as to crop prospects or supply 
and demand were incorrect and their operations 
proved temporarily disastrous, they could main- 
tain their position until the natural course ol 
prices to a higher level had overcome the errors 
of judgment. 

Again, a recognition of the trend will permit 
us to make allowances for it in consulting prece- 
dents. Many people have been ruined by selling 
commodities because statistics showed the price 
to be high and that much lower prices had been 
established under certain conditions in the past. 
Finding the same conditions today in the way of 
supply and demand, crop prospects, etc., as ob- 
tained in a former year, the speculator cannot 
always see why equally low prices should not 
be made. If everything was equal he would be 
right, but everything is not equal. 

Let us see if we cannot clear this point up 
and establish a rough working basis. 

It is a matter of common knowledge that prices 



136 Elements of Speculation. 

of commodities generally have been rising for 
years with occasional reactions in periods of hard 
times or following panic periods. The Gibson 
index number shows the following changes since 
1900: 

GIBSON'S INDEX NUMBERS. 
(Showing cost of living) 













AU other 




Year 


All foods Clothing Minerals Other 


than foods 


Totd 


1890 . 


. 43.4 


17.3 


15.5 


15.4 


48.3 


91.6 


1895 . 


. 42.0 


15.3 


11.0 


13.2 


39.5 


81.5 


1900 . 


. 44.2 


16.3 


14.8 


16.1 


47.2 


91.4 


1905 . 


. 47.3 


18.0 


16.0 


17.1 


51.0 


98.3 


1906 . 


. 49.8 


19.2 


16.6 


19.6 


55.4 


105.2 


1907 . 


. 50.9 


20.8 


18.9 


19.3 


59.0 


109.9 


1908 . 


. 54.2 


17.6 


15.4 


18.3 


51.3 


105.5 


1909 . 


. 59.2 


17.3 


15.2 


20.2 


52.7 


111.9 


1910 . 


. 59.3 


18.9 


15.4 


21.6 


5S.9 


115.2 


1911. 














Jan. . 


. 54.3 


19.5 


15.2 


19.9 


54.6 


108.9 


Feb. . 


. 52.9 


19.1 


15.1 


20.1 


54.3 


107.3 


Mar. . 


.53.3 


18.9 


15.1 


20.2 


54.2 


107.5 


Apr. . 


. 53.1 


18.8 


14.9 


19.4 


53.1 


106.2 


May . 


. 53.5 


19.1 


14.8 


19.2 


53.1 


106.5 


June . 


. 52.9 


19.0 


14.8 


19.1 


52.9 


105.8 


July . 


. 57.5 


18.4 


14.8 


19.3 


52.5 


110.0 


Aug. . 


. 60.1 


17.5 


14.8 


19.1 


51.4 


111.5 


Sept. . 


. 61.2 


17.1 


14.7 


19.7 


51.5 


112.9 


Oct. . 


. 62.0 


16.7 


14.5 


19.4 


50.5 


112.5 


Nov. . 


. 61.3 


16.2 


14.5 


18.9 


49.5 


110.8 


Dec. . 


. 60.8 


16.0 


14.8 


18.5 


49.3 


110.1 



It will be observed that the price of foodstuffs 
has advanced since 1900 from 44.2 to 60.8. 
Downward fluctuations occur at times, but the de- 
clines have been in the nature of reactions and, 
unless the influence which is causing the advanc- 
ing prices ceases or is reversed, we may expect 
this trend to continue upward. As to what that 
cause is, I will speak later. 



speculation in Commodities. 137 

Now let us see how this has been reflected in 
the prices of wheat, corn and oats. In order to 
determine this it will be necessary to arrive at an 
average price for each year. To take merely the 
high and low of the year and accept the middle 
point would not give a very sound showing, so I 
have taken the high and low for each month of 
each year and averaged the whole twelve 
months. The results are as follows : 

Average Cash Prices of Wheat, Corn and Oats 

(1900 to 1910 inclusive) 

Year. Wheat. Corn. Oats. 

1900 $ .71 $ .38 $ .22y2 

1901 72 A9y2 .32 

1902 72^ .S9y2 .37 

1903 79>4 .46 .35y2 

1904 1.03>^ .50y2 .37 

1905 1.01 .50 .30 

1906 79y2 .46 .32y2 

1907 91 .53 .45 

1908 97y2 .6Sy2 .50y2 

1909 1.20>^ .66^ .48 

1910 1.10 .58 .38>4 

Allowing for all the influences of large or 
small crops, it is evident that there is a decided 
upward trend to prices. A year of abnormally 
large production following a previous big year 
will bring the price level down materially, but 
the trend upward is soon resumed. 1906 is an 
example of this. 

Taking the last five years as a basis and throw- 
ing off 20 cents a bushel on the average price 
established in 1909, which was artificially too 
high, we find that the average price of wheat has 
been above 95 cents, corn above 58 cents and the 



138 Elements of Speculation. 

average price of oats about 43 cents. Allowing 
for the fact that this average covers a five-year 
period and that the trend has been upv^ard from 
year to year, barring temporary reversals, it is 
safe to say that the nominal price of wheat 
under normal conditions is about $1, corn about 
62 cents and oats about 45 cents. Of course 
higher or lower prices are established from year 
to year. These movements give us- the specula- 
tive opportunities we are looking for. 

In cotton we find that the upward trend has 
been even more pronounced. This is partly due 
to the fact that in addition to the natural forces 
making for a higher level in prices of commodi- 
ties, production of cotton is not keeping pace 
with increased consumption. The progress of 
prices during the last ten years has been as fol- 
lows : 

Average Price of Cotton. 
(Seasons of 1900 to 1910 inclusive) 

1900-01 7.89 cents per pound 

1901-02 7.40 " 

1902-03 9.99 " 

1903-04 12.42 " 

1904-05 8.66 " 

1905-06 10.83 " 

1906-07 10.68 " 

1907-08 11.11 " 

1908-09 10.01 " 

1909-10 14.45 " 

Eliminating artificial prices made temporarily 
in 1903-04 and 1909-10, and allowing for in- 
crease due to natural causes and the excess of 
demand over production, we may reasonably fix 
the nominal price of cotton at about 12 cents 
per pound. 



speculation in Commodities. 139 

The greatest opportunities in commodrty 
speculation come at such times as prices are un- 
duly depressed because of large supplies or good 
crop prospects, or through manipulative tactics. 
Occasionally it is possible to buy wheat at 75 or 
80 cents a bushel, corn at 40 or 45 cents per 
bushel, oats around 30 cents per bushel, and cot- 
ton around 9 cents per pound. Purchases made 
at such prices are almost certain to bring hand- 
some profits in a reasonable length of time, re- 
gardless of what conditions may be at the time 
of purchase. Of course conditions will fre- 
quently ijiake it inadvisable to wait for such low 
prices as this, but when they do appear they may 
be used as a confident basis of purchases. 

Under normal conditions, with crop prospects ^ 
fair, supplies on hand about an average and ex- 
ports keeping along at about the usual pace, it is 
safe to buy wheat around 90 cents, corn around 
50 cents and cotton below 12 cents. Such pur- 
chases will almost certainly turn out well if pa- 
tience is exercised. 

The scale order method is well adapted to trad- 
ing in commodities, as fluctuations are wider and 
more frequent than in stocks, and the means of 
computing values of grain or cotton are not so 
extensive or accurate as in securities. 

As stated heretofore, in deciding as to the 
probability of this upward trend being continued, 
we must first determine the cause that has 
brought about the higher prices during the past 
decade or more. Several theories have been ad- 
vanced by economists, but all have been found 
faulty or unconvincing ex;cept one — the increas- 
ing gold supply of the world. A majority of 
the earnest students of the subject have adopted 
this theory, some of them quickly and others 



140 Elements of Speculation. 

grudgingly. Not only is the consensus of com- 
petent opinion in favor of the theory, but the 
few writers and thinkers who promulgated it 
years ago have proven their case by correct pre- 
dictions of what might be expected to happen 
to the prices of both securities and commodities, 
so long as the increasing supply of gold con- 
tinues. These writers, for example, contended 
that securities having a fixed rate of interest 
must fall in price unless the rate of interest was 
advanced. They did not except such premier 
investment securities as British Consols. They 
contended that the price of commodities gener- 
ally would continue to rise. Both these things 
have happened just as was predicted. There 
have been temporary reversals, of course, but 
these proved to be fluctuations and nothing more. 

The theory of the increasing gold supply and 
its effect on prices cannot here be discussed in 
detail. There are many ramifications and off- 
shoots, and a comprehensive discussion of the 
subject would require a volume in itself. Simply 
stated, the theory is as follows : 

The world's gold supply has continued to in- 
crease more rapidly than population for years. 
It is an inexorable law of supply and demand that 
when any commodity is over-produced it must 
fall in price. Gold, being a fixed standard, can- 
not fall in actual figures, but it does fall through 
a rise in the prices of the things for which gold 
can be exchanged. The reason bonds fall in 
price is that when capital invested in bonds 
is returned at the maturity of the issue,^ the pur- 
chasing power of that capital has been impaired. 
It will not buy so much food or machinery or 
clothing. We have no way to measure the value 
of money except by its purchasing power. Com- 



speculation in Commodities. 141 

modities rise in price because gold cannot fall 
in price, although it can and does in value. It 
appears to me idle to attempt to refute the state- 
ment that an oversupply of gold will necessarily 
advance the price of all that gold will buy. Let 
us assume, for the sake of argument, that to- 
morrow a mountain of pure gold is discovered 
containing ten times as much of the metal as is 
now in existence. Does any one pretend to be- 
lieve that this vast mass of gold could be ex- 
changed for the same amount of anything else on 
the same basis as that of the present? The value 
of gold would fall as surely as the price of wheat 
would fall if production was increased tenfold. 
This is an extravagant supposition, but only ex- 
travagant as a matter of degree. The changes 
due to over-production of gold are slow and in- 
sidious, but they are certain. 

There is no indication at present that the over- 
supply of gold will cease in the near future, and, 
so long as the increase continues, prices of com- 
modities will seek a constantly higher normal 
price. 



142 Elements of Speculation. 

CHAPTER XIII. 

Conclusion. 

There is absolutely no hope of success for 
the speculator who attempts to operate with- 
out a good working knowledge of his subject. 
Any hope of making money by speculative ven- 
tures based on tips, inside information, tape 
reading, chart playing or any of the various 
methods so frequently employed may as well 
be set down as an impossible phantom. The 
man who cannot devote some portion of his 
time to a study of conditions and the machi- 
nery of the market would better let specula- 
tion alone entirely. Nor will it be found feas- 
ible to merely follow the advice or opinions of 
some one who makes a study of the subject. 
Such guidance is valuable provided the recipi- 
ent understands what is under consideration, 
what is to be expected marketwise and why 
such expectations are warranted. A competent 
adviser may frequently offer suggestions which 
would have been overlooked, but he should al- 
ways accompany such advice with the reasons. 
The adviser may be wrong. No matter how 
careful he is, every man will fall into error oc- 
casionally, and every man who receives advice 
should examine its merits and foundation be- 
fore accepting it. I regret to state that a great 
deal of ignorance is shown by many brokers, 
letter writers, financial editors and others who 
pose as advisers. This is in nine cases out of 
ten due to a lack of study of their subject ; an 
effort to evade hard work and exhaustive exam- 
ination and supply the omission by alleged in- 



Conclusion. 143 

side information or snapshot judgment. They 
are doing just the thing they should strenuous- 
ly warn their followers against doing. It is the 
blind leading the blind. I do not mean to say 
that financial writers, brokers or editors are ig- 
norant or careless as a class, but there is enough 
fallacious writing and incompetent opinion 
from day to day to mislead credulous people 
and cause considerable loss to those who are 
not able or willing to judge for themselves the 
value of the opinions offered. A good many of 
the newspapers in the smaller cities, and some 
of them in large cities, make the very serious 
error of assuming that anybody can fill up a fi- 
nancial page, and if the regular editor is absent 
or incapacitated, his place is frequently filled by 
a man with no knowledge or special training 
for his position. The result would be funny, 
were it not for the damage done to readers who 
know no more than the writer and who accept 
the printed pages of a daily paper or market 
letter at a greater value than they are entitled 
to. The financial organs are indispensable ad- 
juncts to a comprehensive knowledge of finan- 
cial affairs and probabilities and we cannot 
have too many of them or patronize them too 
liberally, but we should be at all times in a po- 
sition to understand what they are talking 
about and to reject or disagree with what is un- 
sound in logic or incorrect in statement. 

It is not, as many people would have us be- 
lieve, necessary to devote the entire time to a 
study of speculation if one is to succeed in such 
ventures. Thousands of successful merchants, 
artisans and professional men invest or em- 
ploy their surplus from time to time in ven- 
tures which are either purely speculative or 



144 Elements of Speculation. 

semi-speculative and some of our greatest Wall 
Street speculators have their fingers on the 
key-buttons of other enterprises. The idea 
that a man cannot do more than one thing suc- 
cessfully in this world is a mouldy old maxim 
which is daily refuted by facts. 

The study and research necessary to form 
correct conclusions as to book values, pros- 
pects and the general business outlook is not 
nearly so staggering or impossible as it might 
appear at first blush. As has been suggested 
heretofore, there is frequently a tendency to de- 
vote time and study to factors of minor im- 
portance which have no power to create or 
prevent the greater swings of prices. There 
are so many such factors that an attempt to 
weigh or study them all results in bewilder- 
ment. A great deal of this work is about as 
valuable as the courses of study in some of our 
public schools and colleges. Many of these 
courses of study are about 25 per cent, neces- 
sary to an education which will carry an intel- 
ligent man or woman creditably through life 
in any social or business line. The other 75 
per cent, is either forgotten or discarded in a 
few years or is merely embroidery. It is so 
with the study of finance and probable secur- 
ity movements. A clear understanding of 
money conditions, crops and our foreign trade, 
together with a working knowledge of the ma- 
chinery of the Stock Exchange, constitutes the 
most important part of such an education. If 
we start out with these factors as the basis of 
our curriculum the other necessary branches 
will be suggested naturally and examination 
and understanding will follow as a matter of 
course. Once a clear and comprehensive view 



Conclusion. 145 

of the factors mentioned is obtained the work 
is reduced to keeping track of progress from 
day to day or from year to year and supplying 
oneself continually with the ample and accur- 
ate information which James J. Hill says is the 
first step towards success. 

There is another point about this special edu- 
cation which is necessary to successful specu- 
lation. Such education broadens the whole 
scope of knowledge and is valuable in any walk 
of business life or social intercourse. It is 
worth having, even if taken up academically 
and with no intention of ever speculating in 
securities. For a young man, such a course 
opens a broader field in any line of business he 
may undertake. A knowledge of money con- 
ditions and the workings of money are neces- 
sarry in every line of business and many large 
concerns gather information as to crop pros- 
pects and other important data yearly at con- 
siderable expense. Fortunately, the advan- 
tages of such knowledge is being more fully 
recognized by educational institutions, and good 
periodicals and the sources of information and 
assistance have been greatly improved and ex- 
tended in the last few years. 

It is astonishing, not to say exasperating, to 
note the number of people who go about reck- 
lessly stating that no amount of study or prep- 
aration is useful or necessary in making specu- 
lative ventures. They state that the stock mar- 
ket is all a fixed game and that prices do not 
respond to conditions. Such statements are 
wholly disproved by precedent. The swings of 
security prices always have been and always 
will be based primarily upon fundamentals, and 
even if misunderstandings, false statements or 



146 Elements of Speculation. 

manipulation should inflate or depress prices 
noticeably at times, such inflation or depres- 
sion is always temporary. The people who 
rashly promulgate the theory of a "fixed-up 
game," etc., never succeed for any length of 
time themselves and they do not realize that in 
following their expressed theory they are elim- 
inating the only possible means of success. 
But their personal losses are not so much to 
be deplored as the evil effects of their ful- 
minations in influencing other people to abjure 
proper investigation and study, and go blindly 
to loss and possible ruin by the fatal roads of 
ignorance and prejudice. Any retailer or pub- 
lisher of financial works will confirm the state- 
ment that the greatest percentage of his books 
go to well-to-do and successful men or to 
young men with a promising future, and the 
tendency to read and study such works is 
growing so rapidly that we may hope in time to 
see the old idea dispelled that, of all the forms 
of speculation, that in securities is the only one 
universally stigmatized as gambling. The only 
reason for this special characterization is that 
for years people have gambled in securities and 
called their gambling speculation. The term is 
abused by reversing this process and calling 
speculation gambling. 

A large number of people constantly "take 
flyers" in securities on some word of advice or 
whispered tip. Sometimes they make money 
on such a venture, which is unfortunate, as it 
leads to further transactions and final loss. It 
is all right to take advice — all you can get of 
it — but get the reasons and be sure they are 
logical and based on correct statements. No 
man on earth can build up a fortune for you in 



Conclusion. 147 

speculation if you do not know what you are 
about. Even if the advice offered is sincere and 
correct, if its recipient is ignorant of the pos- 
sibilities and vagaries of the market, he will se- 
cretly over-extend himself, or be frightened 
from his position by events, the importance of 
which he cannot judge, or will become confused 
by the conflicting advice he is sure to receive 
from other sources at times. He cannot be 
free from such dangers except through a per- 
sonal understanding of the subject. A man 
who cannot read the salient points of a rail- 
road report, or who has no clear conception of 
the forces which make and break security 
prices, has no business in the stock market. If 
he makes a profit at first he will keep on specu- 
lating in an attempt to get rich and if he loses 
he will keep on speculating in an attempt to 
get even. The outcome will be the same in 
every case. 

Speculation is a business, with certain rules 
and laws, and it is necessary to understand the 
business if we are to succeed at it. It is not a 
get-rich-quick business. The rewards are some- 
times very large, but no larger than in other 
lines of business. The losses are greater and 
more numerous than in other lines simply be- 
cause it is the only business on earth an intel- 
ligent man would ever consider entering with 
no knowledge, special equipment or natural 
ability in that direction. No truer statement 
was ever made than that many a man has come 
to Wall Street to get rich and has been ruined, 
while on the other hand many a man has come 
to Wall Street to make a fair return on capital 
and become rich. 



148 Elements of Speculation. 

Nothing will more greatly and pleasantly 
surprise the man who studies speculation cor- 
rectly than the accuracy and facility with which 
he will find himself arriving at correct conclu- 
sions and profitable results. Nothing will more 
surprise the man who does not approach the 
business properly than the rapidity with which 
he will lose his money. Yet in either case the 
outcome is quite according to natural laws and 
would be really surprising if it turned out 
otherwise. The speculator should keep in 
mind and rigidly adhere to the following spec- 
ulative don'ts. 

Don't speculate on tips or alleged inside in- 
formation. Tips are too frequently guesswork 
and when "information" is distributed to peo- 
ple gratuitously it has either ceased to be ''in- 
side information," in which case the market ef- 
fects have been discounted, or the news is dis- 
tributed for an ulterior purpose. 

Don't speculate on advice unless it is accom- 
panied by the reasons on which the advice is 
based, and then only if you are capable of 
weighing such reasons competently. 

Don't be either credulous or prejudiced. One 
is about as bad as the other. 

Don't over-speculate. This is the biggest 
don't of all. Take what you can safely carry 
through a decline occasioned by accident or 
manipulation; or better still, be prepared to 
take advantage of such a decline by increasing 
holdings. 

Don't expect to get rich quick. You will be 
disappointed. Accept returns when it appears 
best to sell, whether they are large or small. 

Don't sell merely because you have a profit. 
Conditions may be such that further profits are 



iii 



Conclusion. 149 

more certain than at the time of the initial com- 
mitment. 

Don't hang on to a losing proposition in the 
hope that something will occur to pull you 
out. If you find your original reasons for buy- 
ing to have been erroneous or if conditions 
change and upset the original calculation, take 
your loss at once and await another oppportu- 
nity. 

Don't take a loss simply because the market 
does not at once favor you or because of a de- 
cline which occurs without any change in 
prospects or conditions. If your original de- 
ductions are correct the market will come back 
to you in time. 

Don't sell as soon as you "get even," after a 
long period of reversal and waiting. That may 
be just the time to hold on. Be governed by 
present conditions and prospects, not by the in- 
tangible and unimportant fact that you are 
"even." 

Don't gamble on stop loss orders, chart sys- 
tems or tape appearances. Don't gamble at all 
— speculate. 

Don't hang over a ticker or spend your 
time watching the blackboard. It does no good 
at all and frequently results in confusion and 
apprehension by magnifying the importance of 
the inevitable and insignificant fluctuations 
which are a daily component of every market. 

Don't speculate at all unless you are willing 
to devote a reasonable amount of time to the 
study of prospects and conditions. Nothing 
else will do. 



The Pitfalls of Speculation 

BY THOMAS GIBSON 

In this volume the author has endeavored 
to discuss as simply as is possible, the salient 
factors of speculation and investment. The 
Table of Contents, following the introduction, 
treats of : 

Ignorance. 

Over-Speculation, etc. 

Manipulation. 

Accidents. 

Business Methods in Speculation. 

Market Technicalities. 

Tips. 

Mechanical Speculation. 

Short Selling. 

What 500 Speculative Accounts Showed. 

Grain Speculation. 

Suggestions as to Intelligent Methods. 

Conclusion. 

BOUND IN CLOTH, 146 PAGES. PRICE, $1. 



THE GIBSON PUBLISHING CO. 
29 Broadway, New York 



The Cycles of Speculation 

BY THOMAS GIBSON 

This book enters a little further into the influ- 
ences bearing on price changes, than does the 
"Pitfalls of Speculation," described on the preceding 
page. 

The Table of Contents introduces as bearing upon 
the subject: 

The Cycles of Speculation. 

The Goid Supply and Its Effect on Prices. 

Money. 

Political Influences. 

Crops, etc. 

Puts and Calls. 

The Question of Dividends. 

Basing Railroad Values. 

Effect of Business Depression. 

Undigested Securities. 

How to Compute the Value of Rights. 

Barometer of Averages. 

Best Method of Trading. 

Indication of Crises. 

The Ordinary Swing of Prices. 

The Factor of Safety. 

Borrowing and Lending Stock. 

Scalping. 

Crop Damage. 

Selection of Securities. 

The Bank Statement. 

The Cycles of Stock Speculation. 

The Cycles of Grain Speculation. 

The Cycles of Cotton Speculation. 

Conclusion. 

Bibliography. 

Bound in cloth, 183 pages; uniform size and bind- 
ing with "Pitfalls of Speculation." Price, $1.50. 

THE GIBSON PUBLISHING CO. 

29 Broadway, New York 



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